APAC Blockchain Conference

The 2nd APAC Blockchain Conference was held in Melbourne last week. According to the organisers, the previous event attracted about 150 people. This year, registrations were around three times as many. The Blockchain story is only just beginning, if the level of interest and the range of conference topics are anything to go by. Here are a few random observations from the two-day event.

A story is just what we got from Robert Kahn, speaking on the role he played in developing the TCP/IP protocol, and the evolution of “Digital Object Architecture” as a way to identify any type of data, regardless of the technology used to create, store or retrieve it.

From NEO founder Da Hongfei we heard about dBFT (Delegated Byzantine Fault Tolerance), and ANZ’s Nigel Dobson outlined the use of Blockchain and DLT (distributed ledger technology) to remove transaction inefficiencies in commercial property lease guarantees. Civic Ledger CEO Katrina Donaghy talked about her work on “Civic Commodities” (government-issued permits and licenses) and “Sustainable Commodities” (water trading, patent registrations).

Gingkoo CEO William Zuo and Novatti‘s Blockchain Head Peter Christo introduced their collaboration on a Blockchain-based cross-border payment platform. There was a presentation on Hcash by Andrew Wasleyewicz, which talked about the “7 H’s” of their solution. While the quirkiest (and possibly most engaging/authentic presentation of Day 1) came from ConsenSys‘s Blockchain expert Lucas Cullen, who told us “7 Reasons Why Not To Use Blockchain Technology” (compulsory listening for any hapless corporate CTO under board pressure to come up with a DLT strategy…).

In between was Data 61‘s Zhu Liming who talked about some of the wider implications and opportunities for Blockchain in his capacity as Chair of the Australian Blockchain and DLT Standardisation Committee. There were also some insights from Gilbert & Tobin‘s COO Sam Nickless on how lawyers must embrace the new technology to avoid becoming disintermediated.

A diverting interlude from economist Lord Desai suggested that “Bitcoins are not coins, and cryptocurrencies are not currencies”. Many might agree, but we already know they are a new asset class in their own right, and need to be treated as such.

Standards (both technical and regulatory) were the topic of a panel discussion comprising mainly lawyers and regulators. The remaining panels on Day 1 (representing commerce and industry) addressed key themes of Blockchain scaling, interoperability, privacy, security and commercial deployment.

Day 2 began with an interesting keynote from former ASIC Chair, Greg Medcraft, now at the OECD. Mr Medcraft is no stranger to the debate on cryptocurrencies and ICOs, but chose to focus his remarks on the benefits, risks and opportunities for Blockchain. On the plus side, Blockchain can reduce the number of intermediaries in a transaction, it provides traceability and transparency, it increases the speed of payments (and reduces the cost), it offers data security, and it provides greater access to markets (e.g., SME supply chains). He foresees fiat and asset-backed digital currencies, and government support for Blockchain solutions in areas such as identity, provenance, supply chain and AML. Plus, for consumers, there should be greater trust and security, better financial access and inclusion, lower costs and better products. Key risks remain, however, in data privacy, security (ID, authentication, cyber-attacks), and consumer and investor protection. Policy makers need to be pro-active and forward-looking, keep up to date on these rapid developments, and co-ordinate across industry, sectors and globally. Citing some of the issues associated with ICOs, Mr Medcraft then urged regulators to exchange information with their counterparts and identify best practice, avoid regulatory arbitrage, create greater legal certainty, and raise awareness of the risks and rewards.

Victor Wang from the China Wanxiang Group followed up with a presentation that re-cast Blockchain as a new economic model, drawing on his reading of “Das Kapital”, and introduced the concept of GBP (“Gross Blockchain Product”). According to this theory, Blockchain is a means to redistribute and reallocate resources and assets; it is transforming the cost of transactions and value exchange; it is creating new assets; and it is building new products and services, as well as the delivery mechanism itself.

We heard from Zuotian Luan of Fortuna Blockchain on the future of OTC derivatives, and how decentralized exchanges are addressing legacy problems of counter-party and credit risk, operational efficiency, and lack of liquidity. He sees a “decentralized margin system” as a long-term solution that will reduce the costs of posting and managing collateral on traditional OTC exchanges.

There was an interesting discussion on the future of capital markets themselves, reflecting the perspective of traditional exchanges, clearing houses and custody providers, plus tZero. (As an aside, I was pleasantly surprised to see so many representatives of the “back office” at the conference, including trust banks and share registries. However, there didn’t appear to be anyone from the brokerage or advisory side, and no-one from the ASX, even though their Blockchain project to replace/enhance CHESS has been widely lauded as being in the vanguard of this new technology.)

Finally, a quick plug for my colleague, Fran Strajnar, CEO and co-founder of Brave New Coin who moderated a panel on ICOs. I think he summarized the tone of the discussion really well, when he said this is probably the only financial services sector that is asking for regulation. “Tell us the rules and let us get on with the job.”

Next week: Tech Talk on Crypto

 

 

What should we expect from our banks?

As I have written elsewhere, bank bashing is a favourite Australian pastime. In recent months, this has struck a new crescendo. There have been various allegations, legal cases and regulatory investigations surrounding such misconduct as mis-selling of products, rate fixing, over-charging and money laundering, all culminating in a hastily announced Financial Services Royal Commission.

Cartoon by David Rowe, sourced from the AFR, published November 30, 2017

The banks had tried to get on the front foot, by abolishing ATM fees, reigning in some of their lending practices, and appointing a former Labor politician to help them navigate the growing calls for a Royal Commission (largely coming from her former colleagues in the Labor party). But the (Coalition) government clearly decided enough was a enough, and sprung their own inquiry into the industry.

For the benefit of overseas readers, Australia has a highly concentrated banking sector, which is also highly regulated, highly profitable, and in some ways, a highly protected market oligopoly. There are only four major banks (also know as the four pillars, as they cannot acquire one another, nor can they be acquired by foreign banks), and a few regional banks. There is a smattering of non-bank financial institutions, but by their very nature, they don’t offer the full range of banking products and services. As an example of this market concentration, the big four banks traditionally account for something like 80% or more of all home loans.

Aside from the Royal Commission, there are a number of policy developments in play which will inevitably change the banking landscape, and the dynamic between market participants. In addition to the growth of FinTech startups aiming to disrupt through digital innovation, there are four key areas of policy that will impact traditional banking:

  1. Open Banking – giving customers greater access to and control over their own banking data
  2. Comprehensive Credit Reportingmandating the hitherto voluntary regime among the big four banks
  3. The New Payments Platform – designed to allow real-time payment and settlement between customers, even without using bank account details
  4. Restricted ADI Regime – to encourage more competition in the banking sector

The major banks have tried to laugh off, rebuff or diminish the threat of FinTech disruption. They believe they have deeper pockets than startups and just as good, if not better, technology processes. Moreover, customers are traditionally so sticky that there is an inherent inertia to switch providers.

But with banks having to set aside more risk-weighted capital to cover their loans, they may be vulnerable to startups focussing on very specific products, rather than trying to be a full service provider. Banks no longer have the technology edge, partly because of the legacy core banking systems they have to maintain, partly because they lack the know-how or incentive to innovate. And changing demographics will influence the way new customers interact with their banks: “mobile first”, “end-to-end digital”, and “banking for the gig economy” are just some of the challenges/opportunities facing the sector.

So what should we expect from our banks? I would say that at a minimum, a bank should provide: trust (but with Blockchain, DLT and trustless, zero-knowledge proof solutions, banks are no longer the sole arbiter of trust); security (linked to trust, but again, with biometrics, digital ID solutions and layered encryption, banks do not have a monopoly on these solutions); capital protection (although no bank can fully guarantee your deposits); reasonable fees (still a way to go on account keeping fees and some point of sale transaction fees – while disruptive technology will continue to challenge legacy costs); and an expectation that it will not bet against the direct interests of their customers (like, shorting the housing market, for example). The latter is particularly tricky, when banks are mainly designed to deliver shareholder value – although of course, most Australian bank customers also own shares in the banks, either directly, or indirectly through their superannuation.

In recent months, and based on personal experience, I think a bank should also know its customers. Not just KYC (for regulatory purposes), but really understand a customer as more than just a collection of separate products, which is how most banking CRM systems seem to work. Given how much banks spend on consumer research and behavioral data, and how much they talk about using big data, artificial intelligence and machine learning to anticipate customer needs, it’s a constant frustration that my bank does not really know me – whenever I contact them, for any reason, I always feel like it’s a process of “product first, customer second”.

Moreover, I can’t think of a single new product that my bank has launched in the past 15 years of being a customer. Sure, they have rolled out mobile apps and online banking, and they may have even launched some new accounts and credit cards – but these are simply the same products (accounts, loans, cards) with different prices and a few new features. Even the so-called “special offers” I get for being a “loyal” customer bear no relation to my interests, or even my spending patterns (despite all the data they claim to have about me). And because banks are product or transaction-driven, rather than relationship-driven, their internal processes fuel silo behaviors, to the extent that the left hand very often does not know what the right hand is doing.

Finally, with more and more of the working population becoming self-directed (self-employed, freelance, portfolio career, contracting, gig-economy, etc.) banks will have to innovate to meet the financial services needs of this new workforce. Bring on the disruption, I say.

Next week: Box Set Culture 

 

 

 

 

The year ahead in Blockchain, crypto, FinTech….

I’m approaching my second anniversary working within the Blockchain and digital currency sector, but already it feels like a lifetime – such has been the pace at which the industry has grown and evolved.

The number (and size) of Initial Coin Offerings (ICOs) in 2017 was staggering. The cryptocurrency markets were equally breathtaking for their price gains (and corrections), matched only by the speed and extent to which some regulators responded. It was a rollercoaster ride, but by the end of the year, it’s fair to say this new asset class had finally arrived.

(For a round-up of 2018 forecasts and predictions for the sector, my colleagues at Brave New Coin have been publishing some handy guides.)

My personal (but far from unique) view on cryptocurrencies in general is that they represent a new asset class. As such we are seeing huge opportunities for investment and innovation, backed by Blockchain and other decentralized and distributed ledger technologies (DLT), as well as some truly innovative and disruptive solutions. There is still some hype, and considerable asset price volatility, plus pure investor speculation; but there are some great projects out there building solid business models; and sound investment cases for network protocols, industry utilities, scalable solutions and core platforms.

In 2018, I expect to see one or more of the following developments:

  1. A fully deployed, government-backed Blockchain project that will change the way citizens engage with public services
  2. A truly decentralized autonomous organisation that learns to make decisions for itself  (based on a set of dynamic, self-replicating governance rules) as to how resources are allocated, stakeholders are rewarded and participants are incentivized (for all its faults, the DAO was possibly the first new corporate structure since the joint stock company)
  3. Following Japan’s lead, more governments will recognise cryptocurrencies as legal forms of payment, while at least one Central Bank will issue a public digital currency as a form of legal tender (not just an inter-bank instrument)
  4. Traditional securities (equities, bonds, commercial paper, asset securitization) will be issued in the form of digital tokens (via a new form of Token Issuance Program) leading to wider distribution, fractional ownership and reduced cost of capital raising, plus streamlined share registry and custodial services, thanks to DLT
  5. Likewise, “traditional” digital tokens will be issued as formal securities, backed by new types of financial products, allowing for greater financial innovation and funding flexibility
  6. At least one crypto-backed ETF will list on a major exchange, along with more crypto-derivatives such as swaps and options.
  7. One or other crypto-currency will be adopted as a day-to-day payment solution for micro-payments

Only two or three years ago, none of the above seemed very likely, or at least not in the short-term. Today, there are multiple initiatives working across each of these trends. So this is not a case of “if”, but “when”.

Enjoy the ride!

Next week: Bring Your Own Change

 

FF18 pitch night – Melbourne semi-final

As part of the Intersekt FinTech festival, Next Money ran the Melbourne semi-final of their 2018 Future FinTech pitch competition.

Ten startups presented, in the following order, in front of a panel of judges representing different parts of the Melbourne startup ecosystem:

BASIQ

Describing itself as “the future of finance”, and quoting the trendy mantra of “Data is the new oil”, BASIQ is an API marketplace for financial data. Designed to counter-balance “the Faustian pact” of big data, social media and search, and to compensate for the information asymmetry of bank-owned data, BASIQ espouses open banking, even though it is backed by two bank-related VC funds (NAB Ventures & Reinventure – see last week’s blog). With a focus on the needs of app developers, the commercial model is based on a licensing fee per user per transaction. Leveraging the AWS security layer (presumably to maintain privacy and data integrity), the pitch also mentioned “screen scraping” – so it wasn’t clear to me whether the data is only coming from publicly available sources? Currently, the platform only connects to financial institutions in Australia and New Zealand.

Breezedocs

A participant in the FF17 Semi-Final earlier this year, Breezedocs is a robotic document processing solution. In short, it can read/scan, sort and extract relevant data from standard documents that need to be presented by customers in support of a loan application. Operating via an API, it can work with multiple document types and multiple formats: data can be structured, semi-structured, or even unstructured. The benefits for lenders and brokers are reduced loan approval times and increased conversion, with much
better CX for the loan applicant as well. The goal is to help the standard loan origination process to go paperless, and could be extended to life insurance, income protection insurance, and immigration and visa applications.

Doshii

Doshii ensures that apps and POS solutions can connect to one another, via a common POS API platform. Apparently, there are 130 different POS providers in Australia, and many merchants use multiple services. Now backed by Reinventure, Doshii has a focus on the hospitality sector. The biggest challenge is physically connecting a POS to the API, so Doshii has developed a SDK. However, so far, only five of the 130 providers have signed up.

egenda

I hope I got this right, but egenda appears to be the new product name for the WordFlow solution for board agendas and meetings. Offering an “affordable web-based solution for every meeting”, the product is currently being trialed by a number of universities. The platform can convert PDF/word files into HTML, transforming and enriching them into a single secure website.
The panel asked how egenda compares to say, Google productivity suite or IntelligenceBank. A key aspect seems to be that egenda is platform agnostic – so it doesn’t matter the source of the document (or where it needs to be published to?). A key challenge in managing board papers is that it’s like herding cats – so a single but highly functional repository would sound attractive?

HipPocket

This US-based app is looking to launch in Australia. A phone-based financial decision app linked to a user’s bank account, it is designed to help with personalised goal-setting, budgeting and financial engagement. Asked whether it can support long-term goals, the pitch referred to data that suggests an increasing number of people are effectively living from pay-day to pay-day, and have no capacity to meet even the smallest of unexpected  bills. Having attracted a grant from the Queensland government, they are currently experimenting with different customer acquisition models, but they hope to prove that with daily engagement, it is possible to build a long-term relationship.

ID Exchange

With a tag line of “privacy protection power”, ID Exchange addresses a key issue of the “consent economy” – how to control who has access to your personal data, and how much, and for what purpose. With the whole notion of “trust” being challenged by decentralised and trustless solutions such as Blockchain applications; the plethora of data connections with the growth of IoT; and the regulatory framework around KYC, AML, CTF, data protection and privacy, there is a need for harmonised solutions. Under an “OptOut/OptIn” solution (from the website, it looks like this is a partnership with digi.me?), the idea is that users take more responsibility for managing their own data. ID Exchange offers a $20 subscription service – but unfortunately, based on the pitch, it was not clear what does this actually meant or included.

Look Who’s Charging

This is a platform for analysing credit and charge card transactions, to identify anomalies and reduce disputed charges. Currently with about 7.5% market penetration (based on merchant volumes?), it can help with fraud checks and spend analysis, by combining AI, crowd-sourcing and data science. But from the pitch, it wasn’t clear where the data is coming from. Also, a key part of the problem might be the data mismatch between card acquirers (merchant services) and card issuers (banks and financial institutions). Given that the growth in credit card fraud is coming from online shopping and CNP (card not present) purchases, it would seem that a better solution is to tighten procedures around these transactions?

Plenty

Plenty describes itself as a “financial GPS”, and is designed to address the issue of poor financial awareness. Only 20% of people see a financial planner, but now with robo-advice tools, even personalised advice can be scalable. Essentially a self-directed financial planning tool, it is free for customers to create a basic financial plan and when searching for a mortgages. For a subscription fee, customers can begin to access other products and advisors, which generates commission-based fees to Plenty.

Proviso

Another of these FinTechs to have featured in this blog before, as well as competing at FF17, Proviso makes “financial data frictionless”, in particular the loan application process. With 250,000 users per month, and 150 financial institutions signed up, their success can be ascribed to the way they standardise the data and the UX. Plus, they can access more data, from more sources, quicker. And then there are the analytics they can offer their institutional clients. In the future, there will be open banking APIs, plus insights, such as the categorisation of transaction types, affordability analysis, and decision-metrics.

Trade Ledger

This is a new platform that supports SME lending based on receivables, that also reduces the effort for SMEs seeking this form of financing. Given that cashflow issues are inextricably linked to insolvency risk, Trade Ledger has developed a unique credit assessment method, and is product-type agnostic. It also aims to offer automated solutions, with an emphasis on the digital UX of products, and use machine learning to generate a predictive probability of default (PPD). Currently the biggest challenge is in the multiple variations of bank credit and lending processes and models that need to be integrated or streamlined.

Of the ten pitches on view, I have to say that none really had a “wow” factor (although if Trade Ledger can scale their PPD model, and if ID Exchange spent a bit more time on defining their key message, both could be huge products). They were mostly worthy ideas, but still defined by current banking and finance procedures. Maybe these platforms need to do more with the transactional and customer data they generate or process, to uncover more opportunities. Or think about what they could do to disrupt adjacent markets? Anyway, on the night, Proviso proved the favourite with the judges.

Next week: Conclusions from the Intersekt Festival