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.
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.
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.
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.
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.
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.
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.
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 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.
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
The Psychology Behind a Strong Security Culture in the Financial Sector
By Javvad Malik, Security Awareness Advocate at KnowBe4
Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.
Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.
With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.
Defining Security Culture: The Seven Dimensions
In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:
- Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
- Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
- Cognition: The understanding, knowledge and awareness of security threats and issues.
- Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
- Compliance: Written security policies and the extent that employees adhere to them.
- Norms: Unwritten rules of conduct in an organisation.
- Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.
All of these dimensions are inextricably interlinked; should one falter so too would the others.
The Bearing of Banks and Financial Institutions
Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.
Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.
Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.
Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.
Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?
Towards Achieving Excellence
There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.
By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.
Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.
Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.
Has lockdown marked the end of cash as we know it?
By James Booth, VP of Payment Partnerships EMEA, PPRO
Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.
Has cashless gone viral?
Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.
Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.
More choice than ever before
Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them.
As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z.
Does social distancing mean financial exclusion?
As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.
Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.
There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.
Supporting the transition away from cash
Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.
Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.
UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies
- UnionPay International today announces that two of Europe’s leading travel companies, Logitravel and Destinia, have started accepting UnionPay.
- This acceptance will enable users of the groups’ travel websites to make purchases using UnionPay payment methods.
The acceptance partnerships between the OTAs and UnionPay began in July 2020 for customers across 13 European countries and another 90 countries and regions worldwide. The European countries covered by the agreements include the UK, Germany, France, Italy, Spain, Portugal, Norway, Denmark, Sweden, Austria, Switzerland, Hungary and Ireland. The brands covered by these acceptances include Logitravel.com and Destinia.com which together deliver more than 8.5 million worldwide travel bookings each year covering flights, hotels, holidays, car hire and other experiences.
With over 8.4 billion cards issued in 61 countries and regions worldwide, UnionPay has the world’s largest cardholder base and is the preferred payment brand for many Chinese and Asian expatriates and students based in Europe, as well as an increasing number of global customers. These cardholders are also particularly attractive to the two OTAs. Despite the impact of Covid-19, Logitravel and Destinia expect to see the demand for travel across the European continent as well as that between Europe and Asia return to growth in the coming years. They are now placing significant focus on offering more payment options and smoother payment services to meet this demand.
The partnerships incorporate UnionPay’s ExpressPay and SecurePlus technology, which will ensure seamless transactions for the customers, contained within a single process through the relevant websites. UnionPay’s technology also provides for the requirement to authenticate transactions under the EU regulation Payment Services Directive 2 (PSD2) ensuring that sites will be compliant as soon as the relevant countries apply the requirements.
Wei Zhihong, UnionPay International’s Market Director, said: “This is a major partnership with two of Europe’s leading online travel companies. Logitravel and Destinia are brands which have been at the forefront of e-commerce for many years and we are very excited to be working with them to extend their reach to new audiences. This highlights the work that we have carried out in ensuring that our technology provides effective solutions for the biggest e-commerce sites both in Europe and around the world. We look forward to announcing many more similar agreements in the near future.”
Jesús Pons, Chief Financial Officer at Logitravel Group said: “UnionPay has always been on our radar, and since travel has become a crucial part of its development, Logitravel felt it important to develop this important partnership. It really was an obvious decision for Logitravel since both companies share a passion for e-commerce and emphasising the payment experience for their customers.”
Ricardo Fernández, Managing Director at Destinia Group said: “We believe that this is the beginning of a really strong relationship. Our discussions with UnionPay in reaching this partnership have demonstrated their understanding of the needs of major online merchants and their ability to deliver the highest quality systems. We look forward to working together on further partnership as we move forward.”
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