There have been many examples of how Blockchain technology is being used in the finance sector, making payments cheaper and faster and very much encouraging and helping to make banking and the wider financial services more inclusive. According the World Bank this is particularly important since, in some countries, as many as 61% are unbanked. Furthermore, of the 1.7 billion globally without a bank account, women account for 55%. However, with ownership of a mobile device and a link to the internet it is possible for those without a bank account to use digital currencies and even access those DeFi platforms offering lending and deposit services. In terms of earning an income, the European Business Review lists 10 on-line games which use NFTs and enable gamers to be paid while they play. So, next time you see your son, daughter, grandchild etc with their head bowed and fingers feverishly cursing across a keyboard, maybe they are being paid a lot more than the pocket money offered to them for doing domestic chores?

Blockchain technology is also being used in a variety of other ways. Self-Sovereign Identity (SSI) is one area that is promising to make our lives much easier by helping us to share our personal information in a more secure manner. Instead of being required to send copies of utility bills, bank statements and ID (such as passports and driving licenses), digital SSI enables personal data to be held cryptographically (i.e. in a highly secure format) thus enabling individuals to share only relevant data with whom they wish. Fraser Edwards, CEO at cheqd, a technology company enabling individuals and organisations to take full control of their data, maintains, “SSI provides an unparalleled opportunity to both return data security and privacy to individuals by allowing them to hold and control their own data but also for businesses to create new services combining historically siloed data sets, which are now centralised around the user." Furthermore, the National Institution for Standards and Technology has also been researching how Blockchain technology is able to protect digital identities - a list of some of its research papers can be found here. 

Meanwhile, within the healthcare industry the use of blockchain-powered platforms is increasing as capital is being invested on a worldwide basis. It is estimated that global spending on Blockchain technology in the healthcare sector will grow at over 82% p.a. to reach $394.6billion by 2028. Some of the areas where blockchains are being used include ensuring that patient records are more secure, improving the efficiency of medical supply chains, and helping healthcare researchers to unlock genetic codes and so develop new medication and treatments.

Voting is another area where Blockchain technology is able to play a role by guaranteeing that each vote is recorded using cryptographic security, followed by the use of smart contracts and potentially SSI to ensure that the correct ballot papers are sent to the right people - whether they be shareholders in a company or citizens in a country. This promises greater transparency as results can be seen if required, in real time, (something that company boards and their advisors would find very helpful) and then maintained, whereby providing an immutable record of the results as to how votes have been cast. Compare this to the current process of using pieces of paper and the risk of needing a recount etc, which is all too common. Of note though, a report from Massachusetts Information Technology (MIT), was shown to be less than positive about the use of blockchain-powered platforms for voting, believing that: “it will increase cybersecurity vulnerabilities that already exist, it fails meet the unique needs of voting in political elections and it adds more issues than it fixes”.

There is always the challenge of compliance with both State and Federal laws. The Banking and Secrecy Act (BSA) deals with AML, and all firms trading/dealing in digital assets need to comply with this. The government body which oversees the BSA and aims to tackle and reduce both the financing of domestic and international terrorism and money laundering is the Financial Investigative Unit (FIU).  Further details about this are given by the Financial Crimes Enforcement Network (FinCEN) which has published a helpful “interpretive guidance” (the Guidance) to “remind” businesses and individuals involved with convertible virtual currencies (CVCs) and digital assets/crypto of the potential applicability of the Bank Secrecy Act (BSA) to their business. Depending on the type of digital assets, compliance requirements with either the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency (OCC) or FinCen will need to be checked.

Tax: The holder of those digital assets making a profit has to pay a Capital Gains Tax rate between 10-37% for short-term capital gains, and 0-20% for long-term capital gains. In the US, digital asset gains are based on your income and the length of time you have held the digital assets. If you are paid in digital assets as part of your employment, such as for a crypto miner, then income taxation is due.

There seems to have been a gradual thawing in attitude towards the way cryptos are treated. The ProShares Bitcoin ETF has finally managed to be the first ETF in the USA to give exposure to BTC. Instead of holding Bitcoins directly, investors in the ProShares Bitcoin ETF will gain exposure via Bitcoin futures. In its first two days, the ProShares Bitcoin ETF amassed $1billion -  it took State Street’s SPDR Gold ETF 3 days. The Winklevoss brothers first tried to launch a Bitcoin ETF on 8th July 2013 when Bitcoin were priced at $68.08 each (compared to over $48,500 now - each a mere 71,000+% rise!)

In Japan (still the third largest economy in the world)

The Financial Instruments and Exchange Act (FIEA) is Japan’s main regulation on financial securities and, in April 2020, the Japanese established two self-regulatory bodies - the Japanese Virtual Currency Exchange Association (JVCEA) and the Japan STO Association. Furthermore, digital assets are treated as legal property under the Payment Services Act (PSA). Digital assets exchanges in Japan are required to be registered with the Japanese Financial Services Authority (FSA) and this can take up to six months to become regulated. The FSA imposes requirements around cybersecurity and asks regulated firms to carry out Anti Money Laundering checks on potential investors. 

Tax: Digital assets are taxed as “other or miscellaneous income”, no matter whether the profit or assets arise from trading, mining or lending. Therefore, the taxation is subject to a sliding tax rate, up to as much as 55%.

In the UK

In April 2021, Rushi Sunak , the UK’s Chancellor of the Exchequer, announced that the Treasury and Bank of England were establishing a task force to explore a CBDC. The Financial Conduct Authority (FCA) had published a guide for crypto assets back in 2019 stipulating that, from 10th  January 2021, all existing cryptoasset businesses carrying out crypto-asset activity in the UK were required to be registered with the FCA. The key requirement is, however, for firms to be able to prove they have robust and comprehensive KYC and AML procedures in place and comply with the Europe’s 5th Anti Money Laundering Directive (5AMLD). Notably, the FCA has been slow in dealing with the backlog of firms applying to be registered and has now extended the deadline from July 2021 to 31st March 2022 in order to review those firms which had already applied before January 2021. Firms conducting crypto-related activities also need to be mindful of the Joint Money Laundering Steering Group (JMLSG).

Tax: HMRC's views on the taxation of cryptos have been consistent and relatively clear. If you make a profit from trading, you will be liable for Capital Gains Tax and if you are paid crypto instead of a salary, then income tax is due.

In Australia

Some are claiming that Australia has become the third largest country in terms of engagement with cryptocurrencies, with 18% of Australian’s owning some form of crypto. Therefore, it ought to come of no surprise that the Select Committee on Australia as a Technology and Financial Centre would appear to be very supportive of the Australian Parliament taking digital assets very seriously since the committee believes there are considerable commercial opportunities for Australia: “Australia has significant potential to keep advancing as a technology and financial centre, if we grasp the opportunity to update our regulatory frameworks, drive innovation and enhance our competitiveness. The committee commends this report and the recommendations in it to government, and industry, to drive this agenda forward.”

The committee has highlighted eight issues in need of addressing:

• regulation of Digital Exchanges.

• an appropriate regime for custodial and depository services for digital assets is required.

• a token mapping exercise to classify the various types of crypto-asset tokens and other digital assets being developed in the market to ensure that the regulatory classifications for these assets are fit-for-purpose.

• a new Decentralised Autonomous Organisation legal structure is needed to ensure that emerging types of blockchain-based organisations can be established with clarity as to how they can operate.

• a review of the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) regulations is required to ensure that these regulations are fit-for-purpose and do not undermine innovation. In particular, issues around the implementation of the Financial Action Task Force 'travel rule' have been raised with the committee as requiring attention.

• taxation rules for digital assets require further clarification. In particular, the rules around Capital Gains Tax (CGT) for cryptocurrency and digital assets need to be updated to ensure that new types of technology structures are appropriately accounted for, and digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss.

• the opportunities associated with digital asset infrastructure were highlighted in evidence to the committee, as well as the energy intensity of cryptocurrency 'mining' practices. The committee is recommending a tax concession for digital asset miners operating in Australia who source their own renewable energy. 

• the committee considers that the Treasury should conduct a policy review on the potential for a retail CBDC in Australia.
  
  

As one can see, it is no mean feat to work your way through the regulations and requirements in order to legally sell and promote digital assets globally. The above has only reviewed, and very briefly, a mere four countries. The challenge for different jurisdictions will be to have regulations which are able to protect investors, all the while not stifling innovation otherwise we will see businesses being established solely in those jurisdictions which have the ‘lightest regulatory touch’. But make no mistake, the potential commercial opportunities creating highly paid and skilled workers and tax are huge. These digital assets are not physically restricted by national boundaries and boarders so, ideally, we need to see greater global regulatory collaboration to arrest a climate of compliance arbitrage which could undermine confidence in this asset class and potentially the Blockchain technology which runs them.

Considering this further, if you are running a business such as WhatsApp, or even Facebook, much of your management’s time is focussed on manging risks and endeavouring to reduce these risks for your shareholders. Therefore, if you are sitting on cash (this being over £85,000 in the UK - i.e. the maximum amount that is protected by the Financial Compensation Scheme) it is potentially less risky to hold your money in a cash-backed stablecoin compared to depositing the money with a bank. The reason is “fractional banking” - a practice not universally popular….

Source: TeamBlockchain

Fractional banking is almost 500 years old. It was widely used by London’s goldsmiths in the 1650s because they realised that the people depositing gold coins with them were all unlikely to require their gold back at the same time. Therefore, the goldsmiths only retained a fraction of the deposited gold and the rest, they lent. This practice remains the case in modern banking today. In essence, a commercial bank takes your deposit and pays, say 0.5%, to a depositor then lends your money to a borrower and charges, say 3.5%. -  in simplistic terms, keeping 3% for lending out your money. However, in the event that the loans are not paid, it is your money, in effect (assuming the bank’s balance sheet is not strong enough or the government refuses to bail out the banks again), that could be at risk. Alternatively, you could, if you have sufficient cash, establish a stablecoin backed 100% by the cash that you were going to deposit in the bank and ask the bank to act as a custodian or trustee, i.e., “Please just look after my cash and keep it ‘ringfenced”. Another advantage of holding your cash in this way is that you know the bank cannot then lend to businesses that may not meet your own ethical/moral standards. The banks unfortunately will only be able to charge a fee of say 0.5% to act as a custodian, hence this is not as attractive for them but, understandably, arguably less risky for the depositor. The downside of this is, were all the large holders of cash to do this, where would the banks obtain the deposits in order to make loans? Who undertakes the role of lending if the commercial banks have no cash? Are we already seeing new lenders in the DeFi space with services such as buy now, pay later, which are growing massively? 

But back to WhatsApp. If it starts to permit its clients to not only send messages but transfer funds globally with a unit of exchange that is backed by cash, as opposed to a ‘promise to pay’, surely this could prove to be a real winner?  This, too, potentially enables Facebook to satisfy its ambition of reaching the unbanked which, according the World Bank, counts for 1.7 billion - with 66% of them having access to a mobile device.

The WhatsApp announcement is yet just another sign that the traditional banks are facing yet more competition, this time in their payments services. But then again, this is not new - after all, PayPal has been accomplishing this for a while and doing it rather well. Hence, it is capitalised at almost twice the value of Citibank!

Alternative assets cover a wide range of investment opportunities such those listed below, as well as cars, jewellery, art, cryptocurrencies and unquoted shares (i.e., private companies) etc.

Institutional investors’ main reasons for investing in alternative assets

Source: Prequin.com

As can be seen, diversification and lower levels of volatility are two reasons often given as to why institutions invest in alternative assets. Investors need to exercise caution, though, when looking at historic measures of volatility and ensure they are comparing like with like. On the face of it, unquoted shares in private companies can appear to be less volatile than a quoted equity because quoted shares are priced daily. Unquoted shares in an investment trust/single country fund (i.e. fund) will typically be revalued quarterly, or maybe monthly. Therefore, at first glance, a fund that invests in unquoted shares may appear to be less volatile than a fund that invests in daily valued quoted shares. Cryptocurrencies, too, can appear to be more volatile simply because they are traded 24/7/365, as opposed to some other alternative assets - cars, art, real estate, or funds such as hedge funds, private equity funds or infrastructure funds - as these are typically revalued weekly, monthly and in some cases, quarterly. 

Interest from institutions in unquoted shares has been gaining momentum as can be seen by Danish pension funds which have invested more capital into unquoted shares than quoted shares in the last three and a quarter years up to March 2021. One way for smaller investors and the general public to become involved with alternative assets such as unquoted companies is by considering investment trusts. Unlike a mutual fund, which gets larger or smaller depending on the amount of capital that is invested, investment trusts are established and capital is raised. It is then usually agreed that the entity will be wound up after seven or ten years and the capital be returned to the investors. In the meantime, the money in an investment trust can be invested into illiquid assets (such as unquoted shares) on the basis that, in a few years’ time, the unquoted company will either be acquired or potentially listed on a stock exchange.

Record year for investment trusts fund raisings (£Billion)

Source: AITC

As the above chart demonstrates, 2021 has been a record year for investment trusts - many of which tend to invest in unquoted alternative investments. According to Investors' Chronicle, sectors proving to be popular in 2021 for investment trust managers in which to raise capital include space, infrastructure, renewable energy and digital infrastructure.

The EU has announced that it is looking to issue €250billion of Green Bonds (debt instruments to fund projects that have positive environmental and/or climate benefits) and this helps to explain why the Green Bond market, which only started in 2007, has grown by 95% p.a. The chart below indicates that the demand from investors seemingly continues to grow as they allocate an ever-rising proportion of their capital to sustainable investing.

% of High Net Worth’s portfolio allocated to sustainable investing

Source: Capgemini

According to EY: “Blockchain technology provides distribution and trust to serve ESG needs and should be provided as a utility, to focus on value instead of technology.” Indeed, in analysis carried out by EY, it also found that: “98% of institutional investors now evaluate non-financial metrics for investment decisions”, adding further, “Financial metrics will be combined with ESG data type, providing insights and forward-looking information for the decision-makers. As a consequence, blockchain will play an important role in the intelligent value chain”. The reason EY can make such a bold claim about blockchain-powered platforms is because this technology has the ability to bring transparency to the very complex supply chains which transport the plethora of raw commodities and manufactured goods around the world. The ability to track and trace commodities dug from the ground or grown in fields and then shipped thousands of miles to another country is now made possible using blockchains, together with other technology such as Internet of Things (IoT) QR codes, Radio-frequency identification, barcodes etc.

Companies such as Minehub and Covantis are good examples of how Blockchain technology is being used to solve the challenge of tracking goods, whereby enabling organisations to assure their customers of the provenance of the goods they are buying and their ESG credentials. Minehub, established in 2019, allows the buyers and sellers of minerals and metals to see, in real time, where their commodities physically are as opposed to relying on analogue-based procedures that historically required couriering or having documents emailed. Meanwhile, Covantis is a trade organisation that is run on the Ethereum Blockchain and has worked closely with ConsenSys. It is designed to help the agriculture industry be more efficient and be able to track and trace goods that are being moved across the world. To learn more about how Covantis functions, ConsenSys has complied a useful case study about which you can see more information by clicking here. 

With its website stating, “Guaranteeing Authenticity and Quality”, AgriLedger is another firm that has actually implemented a blockchain-powered solution resulting in farmers across Haiti receiving up to 7.5 times the amount they would have been paid to grow mangos, avocados etc. AgriLedger’s blockchain- powered platform enables farmers to track and trace the whereabouts of their produce is as it is shipped from Haiti to the USA. Recently, when talking to Genevieve Leveille, CEO of AgriLedger, she said: “Traditionally, when designing equitable systems, we often focus on the consumer.  If we were to start with the smallest or the most removed members of the supply chain, we find they often don't see much transparency in the value chain that they are a part of.  This can be acerbated by the lack of record management, and this creates great opacity that limits their ability to participate in the financial ecosystem and creates a great disadvantage. With AgriLedger we aim to promote the aspect of ‘Clear Trade’ - this is not about what is fair as fair can be something that is relative to an individual’s sense of entitlement.  However, if we can achieve a mechanism where data is trusted and immutable, then we can look to rebalance the stakes and create a system where rewards are based on effort not just risk taking.  Blockchain Technology allows for a record of what has happened and removes the doubts allowing for better collaborations among parties that normally would not be willing to have faith and trust in one another”.

Everledger was one of the first companies to use Blockchain technology to track and trace supply chains, so shining a light on the sustainability practices of the firms that use its platform. Recently, the Everledger platform has been harnessed by Cygnet Bay Pearl farmers so its clients will be able to have a digital certificate that records the history and provenance of the pearls they have bought.

Source: Cygnet Bay Pearl farmer

Meanwhile, a company that is using Blockchain technology to help monitor and assist organisations in meeting their ESG targets is Watr. This is worth keeping an eye since one of its co-founders, Maryam Ayati, has huge experience in the commodities business (having been ex-chairperson of the highly successful Vakt) and has led Shell’s LNG and Marine businesses. Furthermore, Watr’s co-founder, Clint Nelsen, also established Startup Weekend, which has a following of over 2 million developers and people looking to set up their own businesses.

However, it is not merely a question of being more efficient and therefore waste less food or minerals etc but being able to monitor the sustainability of farming and mining methods and enabling the end consumers to be more aware of the original source of the goods they are consuming. Simply by using QR codes on a product the end consumer can see who has grown the produce/made the item etc and, in time, it could show the carbon footprint or other ESG information. The question actually is, how long will it be before we see governments insisting that such information is made available as they tackle the challenges around climate change and monitor companies’ ESG credentials?

2020 global real estate universe in comparison

Source: Savills Research

If you have ever bought a property, you will be only too aware of the parties involved - lawyers for the buyer, seller, and lender, together with estate agents (realtors in the USA), surveyors, insurance, etc - the list seems to go on. Resultant from this are high fees and the inevitable delays and time to gather and verify the requisite information. Using Blockchain technology to buy and sell property can make this often tortuous process more efficient whereby reducing the time it takes to buy a property and furthermore, seamlessly and accurately recording and enforcing mortgage provisions and conditions in a far more transparent manner.

Potentially, there are three ways that Blockchain technology can help:

1. Digitisation of property ownership interests - there is no reason why one cannot, in effect, create a digital record of the details of a property, not dissimilar to a Non-Fungible Token, (NFT) whether the real estate be a house or a commercial building. A property digital record offers the promise to reduce the time it takes to buy and sell a property and increase the liquidity of real estate which has, historically, been classed as an illiquid asset. Undoubtedly, an extraordinary amount of due diligence is required to identify lien priorities, ownership interests and marketability issues for a particular property before a transaction occurs. However, all these details, as well as other information such as any insurance claims, planning issues, maintenance records etc for the property, could be held then traded and transferred on a blockchain-powered platform. The immutable nature of using blockchains means that the accuracy and trustworthiness of the data eliminates the time needed for extensive due diligence and enables real estate to be immediately transferable.

2. Storage of documents on a blockchain ledger - under the current system, parties are required to request title documents, relying on the fact that the necessary documents are recorded correctly and that there has been no mismanagement between transfers in the interim. By holding all the relevant real estate information in one place and recording this data in a structured manner, it would be possible to track and trace ownership interests of the data and be made available on a permissioned basis for the relevant parties to have access. This would yield a clearer record chain of title for a particular property, thus reducing costs and time to obtain title reports between contract and closing.

3. Enforcing mortgage and loan provisions through smart contracts - mortgage contracts are filled with complex contingencies, covenants and conditions that trigger different default events when they occur throughout the life of the loan. Upon the occurrence of a default event, the typical penalty is an increased interest rate until the breach is cured. Smart contracts can automate this process with greater accuracy (and more quickly) than the largely paper-based analogue systems and process currently used.

As to be expected, there are challenges needing to be addressed before we see the wholesale adoption of using blockchain-powered platforms when buying and selling real estate. The different parties will need to agree to use a new way of carrying out property transactions and, most importantly, each jurisdiction’s land registry would need to be convinced that using blockchain-powered platforms are as safe and reliable as the existing tried and tested systems. Dependant on the type of blockchain (private or public), this raises a variety of challenges around how data is stored. Attention would need to be paid in order to accommodate provisions such as GDPR in Europe, but also the fact that there is no federal data privacy law such as GDPR in the US. There are, however, some national laws in place to regulate the use of data in certain industries in the US, such as the US Privacy Act (1974) which outlines rights and restrictions regarding data held by US government agencies.

The real estate market is immense and any small savings that improve the efficiency of how this market functions will need to be carefully examined. Whilst there are a number of firms  looking to offer some form of fractional ownership, the jury is still out as to how popular and effective such offerings are. Blockchain technology certainly offers the promise to fundamentally and radically alter the way property transactions are executed. Some jurisdictions, such as the UK, have now given clarity as to the enforceability of smart contracts.

Smart contracts were first used by Nick Szabo in 1994, but it was not until 2015 when Vitalik Buterin launched Ethereum that smart contracts become better known. Vitalik and his developers built smart contracts on the Ethereum Blockchain to be processed on the Ethereum Virtual Machine (EVM). Smart contracts on the Ethereum Blockchain use ether, otherwise known as ‘gas’, hence the expression ‘gas fees’ to execute a transaction. Indeed, Ethereum’s description of smart contracts reads: “A smart contract is simply a program that runs on the Ethereum blockchain. It's a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain”. Up until recently, people drew a difference between smart contracts and Ricardian contracts (which were proposed in 1996 by Ian Grigg and Gary Howland). A Ricardian contract can be seen as a bridge between paper/text contracts and digital/code with the following parameters: 

• “a contract offered by an issuer to holders 

• for a valuable right held by holders, and managed by the issuer 

• easily readable by people (like a contract on paper) 

• readable by programs

• digitally signed

•  carries the keys and server information

•  allied with a unique and secure identifier.”

Initially, smart contracts were seen as a way to automate transactions on a blockchain-powered platform so were not treated as being a legal document or potentially enforceable. On the other hand, Ricardian contracts were designed to define the contractual relationship between various parties and could be used outside a blockchain. As Limechain has summarised, the difference between a smart and Ricardian contract is that: “A smart contract is essentially a set of instructions on how to execute certain actions based on whether certain requirements have been met. A Ricardian contract also provides the legal framework that underpins all subsequent transactions that may occur under the contract. It defines the parties in the agreement, the possible legal implications, and the relevant legislation that can be used in case of a dispute.” 

In the UK, the legal position of smart contracts has now been clarified. The Law Commission has issued a report confirming that, in order for smart contracts to be legally enforceable, only “an incremental development of the common law is all that is required to facilitate the use of smart legal contracts within the existing legal framework'. Furthermore, Professor Sarah Green, Law Commissioner for the commercial and common law team, has added to this and said: “Smart legal contracts could revolutionise the way we do business, particularly by increasing efficiency and transparency in transactions. We have concluded that the current legal framework is clearly able to facilitate and support the use of smart legal contracts; an important step in ensuring increased recognition and facilitation of these agreements.”

       The history of world reserve currencies since 1450

             Source: Market Business news

The average currency tenure as a world reserve currency is 94 years with the US$ having been the world’s reserve currency for roughly 100 years. So, what will come next? If we go back to 1862, there were 7,000 different types of US$ in circulation; 5,500 of which were fraudulent. So in 1863, the National Currency Act (which became known as the National Banking Act in 1864) was passed and this determined the US’s dollar, whereby establishing a dual banking system with national and state-chartered bank - the only such system in the world. The actual $ sign is thought to have come from the saying “pieces of eight”, meaning 8 silver peso coins for one Spanish Real, which was then abbreviated to PS. It is believed that this was abbreviated so that the S was on top of the P, producing an approximation of the $ symbol.

Back in 1999, it was thought that the Euro could replace the $ but now, given the rise of the Chinese economy, some have suggested that the Chinese Yuan has ambitions to become the world reserve currency. Certainly, the Chinese have made huge economic progress and the official launch of their new digital currency at the Beijing Winter Olympics in 2022 is set to radically alter the way payments are made domestically. We will have to wait and see whether the Chinese start asking for payment in their new digital Yuan for their exports. Perhaps the Chinese will insist that users of the harbours, airports, railways, roads and bridges that China has constructed as part of its  Belt and Road initiative be paid for in their new Digital Currency?

Facebook certainly shook central bankers out of their slumber in June 2018 when announcing that it was looking to launch its Libra digital currency (now renamed Diem). Given Facebook’s 2.8 billion monthly users, it certainly has the global distribution to gain widespread adoption, but governments and their central bankers have not seemed as keen. It has, however, encouraged over 80% of those institutions to initiate their own research into the whether they ought to have their own digital currencies. Also interestingly, Amazon was advertising on LinkedIn earlier this year for the position of ‘Head of Digital Currency and Blockchain’, although the post is now no longer available. Notably, in a row over fees, Amazon has just flexed its financial muscles and will be banning its customers from using Visa as of January 2022. The technology to create Digital Currencies certainly exists. Look at Nigeria with its e-naira - so how long will it be before we have a Digital Currencies being issued by multinational corporations? In terms of the actual infrastructure, Mastercard has announced it is planning to enable 20,000 of the financial institutions to accept digital currencies. Meanwhile, the French supermarket Casino, (with 11,000 outlets in Europe and Latin America) has already launched EuroL, which is a euro-backed stablecoin with the cash held by Société Générale. Casino intends to use the EuroL as part of its customer loyalty program, a precursor as another huge potential market for digital currencies. Even more recently, the Commonwealth Bank of Australia is to allow it customers to use the bank’s app to buy and sell digital currencies - including cryptos!

This surely raises the question, are we to see the launch of the Amazon coin, given it was advertising for a “Head of Digital Payments “ earlier this year and the recent spat with Visa? Amazon’s revenue was $110 billion (Q3 2021), so assuming that 20% of this is paid via Visa at a cost to Amazon of 0.1%, that potentially equates to $88million p.a. of fees. If Amazon were to have its own digital form of payment, how much of this $88million could Amazon save? Thus, will we see Amazon issue its own $-backed digital currency? This could allow it to pay its dividends digitally, it could even get its suppliers to use its new Digital Currency and or use it as part of a loyalty program in the same way that Casino in France are looking to do.

After all, a 100%-backed digital currency is safer than leaving your money in a bank, since at least you know your digital money is backed ‘one for one’ with cash. Compare this to depositing money in a bank which then lends cash to its clients as it leverages the bank’s assets, i.e., ‘fractional banking’. And who knows if the banks clients can repay their loans, especially if interest rates start to rise? Therefore, if you have billions in cash such as Amazon, how safe is the money in the bank?

There is, therefore, a very real possibility that we will witness a return to hundreds of digital currencies being issued by multinational corporations in $, €, £, Yen, CGF, etc, and potentially return to a time, such as in the 1860’s in the US, where the dollars you used were all about the credit worthiness of the institution issuing the currency and less about the $ sign itself. The implications for such a scenario are massive since it could potentially aspirate liquidity in financial markets and severely undermine fractional banking (and therefore the ability to borrow money) - unless we see DeFi filling the gap, in which case banks have even more to be worried about!

It is often said that nothing is new - well, it seems that DeFi has taken a leaf from the history books in following the lead of mutual insurance companies and cooperatives which had pioneered much of the insurance sector we know today. Furthermore, DeFi has embraced the mutualisation based on peer-to-peer transactions. The data held by these DeFi platforms is in a cryptographic manner and decentralised, hence not reliant on one point of failure which so many of our existing centralised services providers currently rely on. Good behaviour is incentivised and poor behaviour is easily identified and penalised. An example of such a DeFi protocol is Feed Every Gorilla (FEG), a community-driven platform which uses smart contracts to help protect investors from ‘rug pulls’ (i.e., when the developers abandon a project and take investors’ money). A market practise constantly monitored by regulators in traditional equity markets is known as ‘front running’, which is when asset managers buy stocks before they buy for a client in the belief that the price will rise once the client’s order is executed. Front running presents a challenge for DeFi exchanges since transactions are broadcast publicly. This means people can see large trades about to happen and therefore try and trade beforehand so as to take advantage of the situation. All they need to do is to work fast and bid high for gas charges so that their deals get processed more quickly. DeFi exchange, Osmosis, is working on a way in which to tackle front running. These previous examples help to give an insight into how DeFi exchanges are learning from the experiences of traditional centralised exchanges and are trying, therefore, to both build systems and use technology so as to ensure that investors can have confidence in how DeFi exchanges operate.

Meanwhile, DeFi has also created new products and services such as Yield farming which transfers cryptocurrencies 24/7/365 between different lending marketplaces, to maximize returns, with no custodians/middlemen, and available to anyone, anywhere provided they have access to the internet. Another service DeFi platforms offer is flash loans used by DeFi traders looking to profit from arbitrage opportunities when two markets price a digital asset at different prices. This means that price differentials are quickly normalised and so, in time, ought to lead to more stable pricing of digital assets. DeFi can enable the way risk is managed in a completely different manner since decentralised exchanges can automatically match buyers and sellers on a peer-to-peer basis ensuring best execution and reducing all human involvement and inherent human error that can so often take place. In effect, this means that anyone with assets is able to turn once passive assets into assets that can be borrowed and generate additional returns, not dissimilar to traditional stock lending which historically has been dominated by only institutional investors.

Whilst DeFi is attempting to reduce and manage risks using technology, there is a possibility that smart contracts could themselves create new types of risks that need insuring. In essence, the power of DeFi is really based on smart contracts, defined by International Insurance.org as : “Smart contracts are irrevocable computer programs deployed on a blockchain that execute a set of pre-DeFined instructions. They are the basis of the DeFi ecosystem as tokens are themselves a smart contract”. Smart contracts rely on data which is ideally sourced from trusted ‘oracles’ i.e. sources that are trusted and independent. This presents a challenge for insurers because if the oracles are defective who is liable in the event of a claim and how can this risk be underwritten. Moreover, who is liable in the event that a smart contact fails? In essence, despite these potential issues, what we are now seeing in the DeFi sector is regulation, legislation and smart contracts overlapping and, until we see greater clarity from regulators, it will be hard for those using DeFi exchanges to truly understand all the risks, let alone insure them.

New risks to address

Source: International Insurance

According to the legal firm Norton Rose, since DeFi is accessible to various jurisdictions a variety of legal and regulatory challenges exist, including:

• the need for analysis to confirm if the structure will fall within the scope of the insurance regulatory perimeter of relevant jurisdictions. 

• risk coverage provided in relation to parametric-type insurance with index-based loss payments also has the potential to push the boundaries of how an insurance contract can operate within existing regulatory frameworks – in particular, the extent to which certain products can arguably be seen to constitute derivative contracts.

• the need for analysis to confirm the status of any tokens issued by the dApp, from a regulatory and securities perspective, in relevant jurisdictions.

Meanwhile, as reported by the Evening Standard: “Increased trading activity amongst retail shareholders through lockdown is set to help deliver a £1.5 billion boost to stamp duty receipts over the next two years”. Surely then, HMRC and tax authorities in other jurisdictions will be lobbying their governments to introduce legislation so that, ideally, all trading carried out by citizens will be liable for stamp duty, or the equivalent. This could prove to be difficult, however, where the exchanges are not regulated and/or not based in the country where the relevant tax authority is located. Exchanges/platforms which are regulated to trade stocks, shares and cryptocurrencies do exist, such as e-Toro, so it would be very easy for these exchanges to levy stamp duty or some form of trading tax. In Germany, Swarm Markets, which claims to be the only regulated DeFi exchange globally  could, in theory, also levy a transaction tax (stamp duty) since having carried out KYC to sign up a client, it could remit the tax collected to the relevant jurisdiction where the client is taxable.

The ten most used Blockchains by institutions

Source: Blockdata

With over 70 million digital wallets now in existence, the volume of digital assets is only set to rise. The table above shows a snapshot of the number of transactions on average per day, for just eleven cryptocurrencies. Furthermore, a report published by data acquisition and analysis company, DappRadar, highlights that:

• NFTs generated $10.67 billion in trading volume during Q3 - an increase of 704% from the previous quarter. Axie Infinity, just one NFT collection has now traded over $2billion historically.

• the DeFi total value of asset locked-in rose 53.45% in the last quarter to reach $178.12 billion.

• the blockchain industry grew 25% quarter-over-quarter and 509% year-over-year in terms of Unique Active Wallets (UAW), reaching 1.54 million daily UAW on average during Q3 2021.

• on-line games attracted UAW increasing by 140% in the last quarter, with reports claiming that 44% of gamers have purchased or traded game-related items on the blockchain in the last year.

With trading volumes and assets such as the above, it acts as a powerful driver for those governments, having run up huge deficits due to COVID-19, to look at new ways in which to raise revenue from taxing digital assets. Interestingly enough, there is no reason why smart contracts could not be employed in order to automatically calculate and deduct a small transaction tax for every digital asset traded. Now, wouldn’t that be ironic for tax authorities globally to be using Blockchain technology to collect tax revenue on assets not regulated by their own jurisdictions? But then again, under the 5th Money Laundering Directive in Europe (and an increasing number of other jurisdictions), regulators are insisting exchanges and platforms must carry out KYC and AML checks on clients even though the assets that are trade and listed on the platforms are not, themselves, regulated - or in some cases, not legally recognised. Whilst it is difficult to gather any exact numbers based solely on the daily turnover of the top 10 cryptocurrencies in a 24-hour period, according to Coingecko, turnover on the 2nd of November was $338billion. Therefore, if you assumed 365 trading days and then levied a transaction/stamp duty tax of 0.5%, this would raise $600+billion! 

Now Mr Taxman, surely this must grab your attention……?

Shadow Economy as a % of the GDP of economy

Source: Acuitymag.com

From research by the World Bank, 31.5% of people over age 15 live without bank accounts globally - that's over 1.7 billion people almost reliant on cash, yet 66% of them have a mobile phone which means they are able to access financial services. One of the ways to tackle the shadow economy is to offer digital currencies and so provide an alternative to cash. Melinda Gates, Co-Chair of the Bill & Melinda Gates Foundation has said “We already know a lot about how to make sure women have equal access to financial services that can change their lives,. When the government deposits social welfare payments or other subsidies directly into women’s digital bank accounts, the impact is amazing. Women gain decision-making power in their homes, and with more financial tools at their disposal they invest in their families’ prosperity and help drive broad economic growth.” Is the Gates foundation or other philanthropic organisations considering the creation of a digital currency to help the unbanked?

 Worldcoin is a company that has created a digital currency to be distributed to as many people as possible around the world. Worldcoin is scanning the irises of people’s eyes as a way to prove identity as people receive and then trade Worldcoin.

The potential for digital currencies has not been lost on governments. According to the European Association of Corporate Treasures, over 80% of the Bank of International Settlement members now have various CBDC projects underway. A Dutch fintech-focused think tank, dGen, has predicted in its recent report “CBDCs: Geopolitical Ramifications of a Major Digital Currency” that three to five countries will completely replace their national currency with a CBDC in ten years. The report outlines significant progress in CBDC by jurisdictions such as the Bahamas and also Sweden, where the Swedish Retail and Wholesale Council has forecast that 50% of its high street store members do not plan to accept cash as a method of payment after 2025.

A digital currency could certainly offer governments a new tool with which to control their economies. For example, they could go the extreme (such as the new Chinese CBDC being launched at the Beijing Winter Olympics in 2022) and be able to know who is spending what, where and with whom. Alternatively, CBDC could be used not simply to make payments faster and cheaper but help reach those citizens who are currently unbanked as well as being able to target payments to those citizens in real financial need, without the necessity to pay the banks to act as the distributors. 

As for corporations issuing a stablecoin, this potentially enables a far more efficient treasury management with the ability to pay shareholders and debt holders dividends and coupons based on the number of days (even hours) an investor has held the company’s shares or bonds. Stablecoins can offer greater transparency to shareholders, regulators and banks (almost in real time) as regards a corporation’s cash balances. Is it of any surprise then that payment platforms such as Visa, Mastercard, Applepay, Paypal, etc, are now able to transact with digital currencies? As ever, whilst there are sceptics concerned that CBDCs could fuel the shadow economy by enabling payments to bypass existing financial institutions, others such as Metlife Investment Management believe that central banks need CBDCs in order to  keep the control of monetary systems from the crypto world, and not allow big techs (such as Facebook’s Diem) to take control.

The banks need to catch up or they will witness firms offering yet more competition, furthermore, undermining the banks with their new financial tools - digital currencies.

Energy Bitcoin Blockchain uses p.a.

Source: Cambridge Bitcoin Electricity Consumption Index

Bitcoin, with its Proof of Work (PoW) method of operation, compared to other blockchains that use Proof of Stake (PoS), is clearly much less efficient when it comes to measuring the amount of energy PoW Bitcoin uses to record a transaction. However, it is worth remembering that the amount of energy that Bitcoin uses is security metric, not speed or transaction metric, thus Bitcoin does not require more energy for more transactions since these 2 metrics are completely independent of each other. University College London’s (UCL’s) Centre for Blockchain Technology has recently carried out a survey to look at different PoS blockchains and their energy consumption.                                           

The Global Energy used per Blockchain

Source: UCL Centre for Blockchain Technology

Whilst the above examples use less than a 1/3 of the energy of Bitcoin, Dr Paolo Tasca, from UCL’s Centre for Blockchain Technologies, asserts: “However, through this research, we have found that not all proof-of-stake networks are created equally. This is something that both investors and adopters need to be wary of when selecting their network of choice.” He also advises to be mindful of the potential environmental impact of Ethereum 2.0 since it may well prove not to be as eco-friendly and efficient as some claim it will be. Furthermore, UCL found that a permissioned PoS blockchain consumed even less energy compared to permissionless blockchains, so this could be a key factor when considering which blockchain to use. Also, despite the energy required by blockchains to operate, UCL reported in its conclusion that: “POS based systems could even undercut the energy needs of traditional central payment systems, raising hopes that DLT can contribute positively to combatting climate change”. In order to address the amount of energy required to power the Bitcoin Blockchain, new more energy-efficient protocols are being harnessed. One of these is Lightning Networks which is being used for payments and for messaging, such as by Sphinx Chat (similar to WhatsApp).

Power used on a Bitcoin Lightning network versus a typical Social Media site

Source: CoinCorner

Of note, Bitcoin has rallied from $40,000 to over $58,000 in the last few weeks and the US’s largest bank, JP Morgan, believes this recovery is due to “the re-emergence of inflation concerns among investors and they are trying to use Bitcoin as a hedge”. Furthermore, JP Morgan claims the three reasons helping to explain Bitcoin’s recent price pick up are that:

• both Federal Reserve Chairman, Jerome Powell, and SEC Chairman, Gary Gensler, reported to Congress this week that they had no intention in banning cryptocurrency, as China had. The SEC claims it is taking a different approach to China, focusing on investor protection and regulation.

• the recent increasing use of the Lightning Networks enables Bitcoins to be sent extremely fast and are gaining more attention “helped by El Salvador’s bitcoin adoption,”   

•  JP Morgan clients since the beginning of 2021, $10+ billion has flowed out of gold exchange-traded funds (ETFs) and $20+ billion has gone into Bitcoin funds.

Price of Bitcoin v Gold

Source: Goldmoney

Certainly, Bitcoin’s recent rally has helped it to out-perform gold. One the challenges that Bitcoin  and other cryptocurrencies face is that they are still a relatively difficult asset class for many institutions to invest in. After all, gaining access and safely holding Bitcoin requires specialist knowledge for private investors too. According to the Australia Financial Review, a survey of 2768 people in Australia found 23% of respondents wanted their pension funds to include crypto assets and, of the 5134 people who already owned crypto assets, 67% wanted to be able have cryptocurrencies as part of their pensions and savings. Millennials were found to be the most eager for crypto-exposure in their pension funds, with 40% of respondents born between 1981 and 1996 agreeing or strongly agreeing that superannuation managers should include this asset class. 

According to Canada-based company, Goldmoney: “The implications and prospects for fiat currencies’ purchasing power is dawning on the millennials who half understand the monetary problem. It has yet to dawn on the wider public…..Chasers of the crypto money mirage would do well to dismiss the hype and inform themselves properly about money. Gold has been true money throughout history, always re-emerging when fiat fails. No fiat, no electricity, no bitcoin”. What with the cost of energy prices rising, a lack of labour due to high unemployment, and on-going supply chain challenges creating shortages of goods, it is easy to see why we could see inflationary pressures mount. As ever, the key to a successful portfolio is diversification - hence we are likely to see inflation hedge old favourites such as gold and real estate to attract investors’ attention as well as Bitcoin.

Will users of Digital Assets need traditional custody providers? 

Custodians by assets under custody

Source: The Asian Banker

Banks are increasingly coming under pressure to adopt new business practises and offer alternative products and services as financial markets evolve and further embrace technology, both at an institutional and retail level. With our lives becoming increasingly digitised, there is a growing dependency on IT and machine-based processing as opposed to many of the paper-based analogue systems that historically have been the backbone of banking systems and procedures. For example, there is a growing question as to the current need for custody services which have historically been provided by banks offering to hold assets (such as equities, bonds and commodities) on behalf clients in a safe and secure manner. 

Custodian bankers don’t tend to offer what one would class as traditional banking services - mortgages, current accounts or lending services - but have focused on offering institutional services particularly for fund managers. At one level it is rather strange that an investor in a fund managed by Blackrock, the world’s largest fund manager with over $7.1 trillion of assets undermanagement, needs to rely on a third party such as a custodian and not Blackrock for the security of its funds. Financial services regulators, such as the SEC in the US or the FCA in the UK, insist that Blackrock must use an external and independent custodian to actually hold the assets e.g. the equities or bonds in a fund. This adds to the costs of the fund for the investor as well as an added level of complexity and requirement for more records to be checked and monitored, alongside the inevitable queries and time delays in reconciling data. At the time, the requirement for such a system was developed when asset managers were required to physically deal in paper-based assets, and it was extremely difficult to be certain who actually had the physical possession of a share or bond certificate.

Unsurprisingly today, there is the threat of redundancy for this rather archaic way of managing money what with the existence of digitisation of information. The ability to hold data in a very structured manner means that machines can easily track and trace who owns what, and where the assets are held, in ‘real-time’. The application of Blockchain technology and use of smart contracts ensures that many of the current manual checking and monitoring can be carried out automatically. Therefore, it ought to be of no surprise that organisations such as the Depositary Trust and Clearing Corporation (DTCC) has been working with IBM to build a Blockchain-powered platform to handle the current $10 trillion of derivatives that the DTCC handles p.a. Recently, the Singapore financial regulator has granted permission to allow the Asian bank, DBS, and cryptocurrency exchange, Independent Reserve (based in Australia), to offer digital asset services to retail as well as to institutional clients in Singapore. Adrian Prelozny, CEO of Independent Reserve, urged Australians to take an example from the Singaporean “thorough approach to crypto industry licensing”, reminding them that “there are no custodian requirements for the exchanges in Australia”.

Meanwhile, there is an argument that by using a multi-signature wallet there is no need to have a separate firm to provide custody services, since the only way assets can be transferred from a multi-signature wallet is if a number of the multi-signature parties are involved. This sounds attractive as no one party is solely responsible for holding the digital asset safe and therefore the custody costs can be less. However, multi signature wallets do present challenges:

• if something goes wrong, seeking legal address may prove to be a challenge since multi signature wallets are relatively new concepts.

• transaction speed may be slow because multi signature wallets need more than one party to execute a transaction. 

• the process of recovery of a multi-signature wallet requires importing each of the recovery phrases on a different device, which is not a fast process.

How the world has become urbanised

Source: World Economic Forum

In more simplistic terms, a smart city looks to improve transportation, reduce congestion, and create more inclusive social services all the while being sustainable, so making the city a more desirable place to live and, in essence, solving the challenges of urbanisation such as increased demand for energy, water, transportation, waste disposal by using technology. City planners are realising that to make cities fit for purpose and ‘smart’, data is the key. Technology, such as Internet of Things (IOT) connected by using Blockchain-powered platforms, offers some real advantages in terms of collecting, managing, holding, and sharing data in a distributed but secure manner. This is opposed to centralised systems (which often lack the ability to scale and are reliant on one organisation) having control of all the data and, even worse, if hacked or subject to cyber-attacks the database is reliant on only one point of failure.

For example, a Blockchain-powered platform can store the history of vehicle accidents, their maintenance, miles driven, when and by whom. From this, premiums could be adjusted (depending on particular vehicles and the drivers) since data on insurance claims and maintenance parts can be processed automatically based on IoT devices inside a vehicle. Furthermore, as regards transportation, research has been carried out looking at how to try and minimise Particulate Matter (PM) from tires and brake dust with the use of Blockchain technology being chosen because the researchers claimed this technology had the ability to: 

• respect the privacy of individuals,

• be trust-worthy,

• offer fair access to the geographic area for all citizens. 

All of these are important in developing human centric solutions to technical Smart City problems.

In the US, there are plans to create a smart city called Painted Rock in the state of Nevada, covering 68,000 acres. Unveiled last year, the plans envision a city of more than 36,000 residents, 15,000 homes and 11 million sq ft of commercial space. Blockchain LLC (the company behind these plans) estimates that eventually the city will generate $4.6bn in output annually and will be run using Blockchain technology. In Dubai, there are even greater ambitions with Digital Dubai stating: "Adopting Blockchain technology Dubai stands to unlock 5.5 billion dirham in savings annually in document processing alone — equal to the one Burj Khalifa’s worth of value every year. The Dubai Blockchain Strategy establishes a roadmap for the introduction of Blockchain technology for Dubai and the creation of an open platform to share the technology with cities across the globe. The Dubai Blockchain strategy is built on three pillars of government efficiency, industry creation and international leadership.” In order to fulfil its ambition to be a smart city using Blockchain technology, the Dubai Future Foundation has created the Global Blockchain Council. The Council will have 46 members including government representatives, global firms, UAE banks and international Blockchain technology firms.

However, the FCA is slowly granting registration for firms and adding them to the FCA crypto register - on the 26th of August, Coinpass, a UK-based firm which buys and sells crypto currencies was successfully added to the FCA crypto register. It has also recently agreed for another company, Ramp, to be allowed onto the FCA crypto register. Meanwhile, according to the FCA, also in the UK: "On 25 June 2021, the FCA imposed requirements on Binance Markets Limited. The firm complied with all aspects of the requirements. See our Supervisory Notice. See the FCA Register for any requirements that apply to the firm. These requirements remain in place and BML are still unable to conduct regulated business in the UK". One wonders whether this announcement from the FCA will give some comfort to those other regulators expressing concerns as to Binance, especially with regards to AML/KYC procedures. Interestingly, from a recent post we put on LinkedIn regarding the FCA adding firms to its crypto register, we had considerable interest not just from the UK but also internationally, as can be seen from the various jurisdictions below.

Source: Teamblockchain.net

This interest from various jurisdictions serves to highlight the global nature and interest in

cryptos and how they are regulated. Whilst professional advice ought to be always taken before conducting any activity in a country, Global Insights has a comprehensive summary for different countries when it comes to legislation in the various jurisdictions across the
world. Jeffrey Wang, at Amber Group, a Canadian-based crypto finance firm, recently said: “Regulation is probably one of the biggest overhangs in the crypto industry globally”.  

The Asia Securities Industry & Financial Markets Association (ASIFMA), a regional trade association, has written a report titled, ‘Tokenised Securities in APAC’. This report has interviews from the Hong Kong Securities and Futures Commission, the Bank for International Settlements, Blockchain technology firm R3, Switzerland’s SIX Digital Exchange and the Singapore Exchange (SGX). The report found that the market is beginning to appreciate the advantages of Digital Assets. Furthermore, there have been a number of projects such as Deutsche Bank and Singapore fintech company, Hashstacs, announcing they are to issue  to digital bonds. HSBC Singapore and Marketnode, the joint venture between the SGX and Singapore sovereign wealth fund,Temasek, have revealed the completion of a digital bond using Marketnode’s platform.

The lack of regulatory clarity not only dissuades some private clients but is a huge barrier for institutions to engage in cryptocurrencies. However, despite this, we continue to see a rise in interest and, indeed, in trading volumes for Digital Assets in various forms such as DeFi tokens, NTFs and cryptocurrencies. The regulators must somehow try and keep pace with this fast-changing sector; especially difficult when many of the new platforms are decentralised whereby making it very hard to track down who is actually responsible when something goes wrong.

Crypto Regulation World Map

Source: Elliptic

There is also the added complication of firms such as Sky Mavis, (based in Vietnam), which developed Axie Infinity, itself now one of the highest-grossing blockchain games in the world according to the decentralised app ranking provider, DappRadar.com. Axie Infinity has players worldwide buying and sell in effect NFTs/crypto assets and turning over hundreds of millions of $s a day. It will be interesting to see if regulators turn a blind eye to such activities or will we see some, such as the SEC, eventually crack down on such firms in the same way that it appears the SEC is doing with Uniswap? Charles Randell, Chair of the FCA in the UK, recently said in a speech worth reading: “Good financial regulation supports innovation, productivity and economic growth. In regulating the online world, we need to strike the right balance between fostering innovation, providing an appropriate level of protection and allowing individuals freedom to take decisions for which they are responsible”. 

The challenge is striking the balance between not stifling innovation but maintaining confidence in the financial system, all the while protecting investors. On the face of it, it seems an impossible task for a regulator to be able to authorise a truly decentralised organisation. In essence, the monitoring and conduct is being carried out by the members for the members, so one would hope they would have the best interests at heart for those using their platforms. Furthermore, it is encouraging that regulators are engaging and discussing the challenges around regulating Digital Assets. The jurisdictions that are truly able to embrace Digital Assets could well find many firms beating a path to their door, generating jobs and taxes for the economy as a whole.

The traditional ways of issuing debt and being tied to one jurisdiction (therefore needing to comply with certain tax requirements) may well not hold true for the issue of digital debt instruments. It is claimed by the German firm, Cash link, that over the life cycle of a bond, by using Blockchain technology it is possible to save 35% of costs by automating many of the current manual processes such as updating bond documentation. The use of blockchain could also reduce the number of intermediaries involved since bonds may no longer need to be registered with a central securities depository. Even more extreme, HSBC Blockchain technology could help streamline the process of tracking the use of bond proceeds, resulting in savings of as much as 90%. Either way, as costs are reduced it becomes possible for smaller debt issuance programs to be undertaken by firms which historically have not been able to access capital from the bond markets. Denis Coleman, from Goldman Sachs is reported as saying: “By lowering some of the barriers to participation in bond markets, blockchain technologies could eventually open them up to much smaller players. This is just the very start of a journey, but you could see the democratisation of bond markets.”

How do executive view Blockchain and Digital Assets?

Source: Deloitte

Therefore, it should be of no surprise to see the findings the Deloitte 2021 Blockchain Global survey (based on 1,280 firms world-wide) be so upbeat about the use of Blockchain and Digital Assets: “Banks and industries other have no choice but to embrace change Participation in the age of digital assets is not an option - it is inevitable. Leaders are only left to decide how and when their organisation should start - and how to use digital assets and new global financial infrastructure to their greatest advantage”.

As we start to see the issuance of more Digital Assets backed by real estate, debt and equities, there will be a growing demand to be able to make income payments digitally - i.e, rent, coupons and dividends. There is no reason why such digital income payments cannot then be made on a weekly or at least monthly basis as opposed to the current six-monthly distributions, which is the norm in equity markets with quoted companies making interim and final dividend payments. As investors and managers of mutual funds are offered a choice of greater transparency (one of the key attributes that Blockchain technology enables) lower costs and potentially more frequent income payments and the demand for more Digital Assets is likely to grow.

The future of Digital Assets

Source: Deloitte

As we have seen, what some call ‘the democratisation of wealth’ has created a fertile hunting ground for the nefarious-minded to prey on people’s ignorance. The desire for some investors to make (as the Americans would say) a ‘quick buck’ has led to a raft of con artists and scammers trying to misappropriate investors’ funds. In part, this has led to an initiative by the UK government called Take Five to Stop Fraud. The government has even been involved in the creation of Scam Academy, designed to help people “spot and steer clear of – three of the biggest financial fraud scams in the UK today...Email scams, Number spoofing and Phone scams”.

Take Five To Stop Fraud

Source: Take Five To Stop Fraud

Fraud and scams are nothing new when it comes to money. CBS News lists its 14 top Financial Frauds as evidence of this including, back in 193 AD, a Praetorian Guard who tried to sell the actual Roman Empire, and in 1785, a corrupt priest and his prostitute lover (posing at Queen Antionette of France) who used the Queen’s line of credit to purchase a necklace is claimed by some to have helped start the French revolution! Unfortunately, scammers are increasingly turning their attention to Digital Assets, which are not (at the best of times) an asset class easy for novices to fully understand with its dazzling range of acronyms. The majority of Digital Assets are not regulated; therefore investors cannot rely on the safety net of investor protection schemes, but they are increasingly being drawn into Digital Assets because of the spectacular returns some of these Digital Assets have achieved. 

Furthermore, the problem of scamming appears to be worsening with the Federal Trade Commission in the US having reported: “Since October 2020, reports have skyrocketed, with nearly 7,000 people reporting losses of more than $80 million on these scams. Their reported median loss? $1,900. Compared to the same period a year earlier, that’s about twelve times the number of reports and nearly 1,000% more in reported losses”. Organisations such as CryptoChain University list various dubious websites where scams or fraudulent ICOs have occurred, and the Cryptocurrency Scambook cites 15 different scams to be aware of - worth a read for pointers as to helping decide if what you are being offered is a scam. As the article states: “A reminder to always make it a habit of being sceptical.” Arguably, the biggest scam associated with Digital Assets was Onecoin, perpetrated by the Crypto Queen, about which the BBC released a nine-part podcast. Onecoin never actually created a cryptocurrency - it was a hoax and scam from inception, yet managed to ‘snaffle away’ a reported $25billion.

The Crypto Queen

Source: BBC

Crypto scams are still occurring, and it is thought that 2021 will be a record year with over 14,000 scams being reported in the US alone in Q1 2021, with a combined value of over $215million.

Meanwhile, more platforms and exchanges are becoming regulated which will only encourage institutional investors into trading Digital Assets. Hopefully, regulated entities such as the DeFi BaFin (German regulator) platform, Swarm Markets, and the Digital Asset exchange, SIX (licenced by FINMA, the Swiss Regulator) have stronger risk controls built in to protect investors and will be monitored by their relevant regulator on an ongoing basis. Whilst these firms cannot guarantee their clients to be free from scammers, they ought to provide accountability in the event of a problem. In theory, regulated entities will have some kind of insurance cover in place and will have been established with systems and procedures to help protect those who trade on their platforms.

As the Digital Asset sector matures and we see greater engagement from institutions, who have a duty of care to their investors when looking after and managing their money, these institutions will need to be comfortable that the infrastructure on which these Digital Assets are traded, are secure.Regulation will undoubtably help offer comfort and ensure that those offering trading, banking, custody services etc are able to help in the battle against scammers and those intent on fraud and theft. But technology, too, will have a vital role to play. However, it is worth bearing in mind that fraud and scams are not just limited to Digital Assets. According to a report from TransUnion: “Digital fraud attacks against financial services companies increased 109% in the U.S. during that same period. Globally, fraud attempts in this industry were up 149%”. In the UK, the consumer credit reporting company, Experian, has stated that: “data from the National Hunter Fraud Prevention Service, the analysis uncovered an alarming surge in fraudulent activity targeting British businesses and consumers.

• The fraud rate for current accounts rose by 13% in Q2* compared to the previous quarter and was up 24% when compared to the same period in 2020.

• Confirmed fraudulent openings for savings accounts rose by 170% - the fraud rate now being three times the rate in the previous quarter and five times when compared to the same quarter last year.

• Loan fraud rates rose also by 40% in Q2, its highest reported level in the last three years, and up 63% on the same period last year.

• First-party fraud related to loans - where an individual gives false information or misrepresents their identity to access a product on more favourable terms - also rose by 18%.”

Given the cost of fraud and scammers, technology and systems are being developed to report on an exception basis using Blockchain technology (with its ability to offer greater transparency and cryptographic security) along with AI, big data and machine learning to help identify suspicious activities and highlight such events. This reduces the historical reliance on paper-based manual analogue systems which often require much laborious box-ticking - not only expensive but uses valuable compliance resources from focusing on managing the real risks in a business. As ever, treat with great suspicion those promising returns that sound too good to be true or, as Thomas Tusser wrote over 460 years ago in 1557: “A fool and their money are easy parted”. So, before you invest make sure you understand what you are doing, carry out your research and typically only invest what you are prepared to lose. Yes, the potential returns offered by Digital Assets appear tempting and there exists a very strong argument to have some exposure to this asset class. But always remember:

Caveat emptor - buyer beware……

DeFi what is it?

• DeFi uses Blockchain technology and removes the need for intermediaries such as banks, brokerages, exchanges, clearing houses, custodians etc, to enable financial transactions to take place.

• DeFi is decentralised and often relies on computer-based Smart Contracts, many of which use the Ethereum Blockchain (which currently means that some transactions can be relatively expensive and slow).

• The net value of assets locked into DeFi platforms is approximately $86.5 billion, a considerable rise since as last September as then there were only $20billion worth of assets on DeFi platforms.  

• DeFi platforms enable users to lend or borrow funds, offer insurance or trade assets.

Why the fuss?

DeFi platforms can offer the ability to trade 24/7/365, unlike the current financial markets. In October 2020, the FCA announced retail investors are not allowed to buy derivatives that give exposure to cryptos. According to the UK newspaper, the Telegraph: “Bitcoin is the original and still the most important cryptocurrency, but it cannot be owned directly in traditional tax-efficient accounts such as Isa and pensions”. Yet it would seem you can now simply pop down to the Post Office and buy a crypto as using  your EasyID verification with Swarm Markets. The German regulator, BaFin, has given regulatory approval to the Swarm Markets DeFi platform so will the FCA, therefore, ban retail investors from dealing with a regulated DeFi platform? Are we to see fund managers being allowed to use Swarm and buy cryptos in UCITs for ISAs and pension funds? Payment firms such as Visa, Mastercard, Applepay, Google Pay, Samsung Pay, PayPal have all taken a market share from the banks in the payments markets so could we see DeFi platforms that offer higher returns from depositing funds or DeFi lending services begin to threaten another core service which was historically offered by the banks?

What are the regulators doing about DeFi?

Depending on which jurisdiction you look at, it would appear that the regulators take almost opposing views. In the US, the SEC is very active in pursuing firms  that are not regulated and whom it believes are selling securities as Blockchain Credit Partners, based in Cayman, as its two founding directors found out. The company Blockchain Credit Partners has been paid penalties of $12million  and two of its directors have each paid to in penalties $125,000 as the SEC claimed that Blockchain Credit Partners had sold $30million of securities via their DeFi Platform. 

DeFi future?

Although the use of Blockchain technology would enable LEAs to replace bureaucratic systems in a variety of ways, they would absolutely need to be cognisant of what data is held and who has access to this data in accordance with GDPR legislation. However, this ability to verify and share information about children and young people known to a local authority could resolve many issues LEAs face regarding SEND. Such a new digital blockchain-based system would help to make holistic assessment feasible, ensuring appropriate intervention by monitoring and reviewing a child on an on-going basis. Blockchain technology would remove the need to have to trust in a centralised data controller (typically the school the child attends) in order to accurately represent the child’s needs for support and provision. Since all this data would automatically be shared with the LEA and relevant professional carers, on-going intervention could also be automatically triggered using ‘trust free’ smart contracts. Once services have been delivered, the ability to establish and implement self-executing pay-on-delivery would improve the quality of the evidence submitted to tribunals (and potentially the decisions made by judges) by providing clear quantitative data on the exact cost of a child’s support.

Another way that Blockchain technology could be used is the automatic payments of benefits. Chainlink is a ‘decentralised oracle network’ providing reliable, tamper-proof inputs and outputs for complex smart contracts on any blockchain. For example, Chainlink can be used to monitor weather temperature and rainfall data. By using smart contracts, automatic payments could be made against a local authority’s insurance policy covering flooding, power outage or sustained abnormal temperature fluctuations.

Source: Chainlink

In Reno, Nevada, the mayor is optimistic about using Chainlink, saying in a tweet: “The time is now to work on great projects for Nevada. $LINK.” Since blockchain-powered platforms have the ability to hold and store data, this enables the historic spending and payments made by a local authority to be very transparent. Interestingly, local authorities in the US will be receiving substantial funds in the near future from the American Rescue Plan which allows Federal relief funds to be sent directly to state and local governments of all sizes. The main goal in passing this legislation has been to help the US to recover from losses caused by the COVID-19 public health emergency. How and where these funds are spent is important - certainly the use of Blockchain technology in this instance would ensure such funds are allocated correctly and appropriately.

Meanwhile, according to the publication BBN Times : “Every year, an average commuter in the United States spends 42 hours in traffic and over $1400 for gas while their vehicle stands idle”. Undoubtedly, Blockchain technology could improve the efficiency for collecting road tolls by providing secure automated payment solutions. Tolls on roads and bridges, such as the Dartford crossing on the M25, often have long queues especially during rush hours. Blockchain-powered smart contracts can enable automated payment with the help of a digital identification system, thus shortening long queues and commute time. One of the major issues that IoT and AI-based traffic management systems might face is the security of collected data. Since the IoT sensors and cameras will be connected to vast databases, hackers may attack networks to breach crucial data. In such a scenario, Blockchain technology can prove to be a solution. Storing the collected data on a transparent and decentralised manner helps to create a more reliable and secure way to collect and store such data.

With such awareness these days about carbon footprints one of the key challenges local authorities face is how to encourage their residents to use their cars less and ‘share rides’ as more of a means to reduce levels of congestion. Arcade City, a blockchain-powered platform, allows drivers who share rides to establish their own rates and then takes a percentage of rider fares. This allows Arcade City to appeal to professional drivers, who would rather build up their own transportation businesses than be controlled from a corporate headquarters: i.e. drivers on Arcade City are free to set their own rates, build their own recurring customer base, and offer additional services such as deliveries or roadside assistance. Another blockchain-based ride sharing app is Drife, based in Bangalore, which uses “personalized smart contracts” between drivers and riders. Drivers stake Drife’s DRF token to be chosen for rides and instead of paying a fee on every fare, Drife drivers pay an annual fee to use the app. 

Source: Cycle4value

In Europe, Cycle4value, which employs incentives to encourage people to use bikes as opposed to cars is currently being tested in Austria as a way to help reduce pollution and traffic congestion. Cycle4value explains its offer as: “With every bicycle ride, the Bike Citizens app calculates how many Cycle Tokens you get deposited on your digital wallet. What makes Cycle4Value unique, is that you can exchange your tokens for real products and in the meantime your “real wallet” can stay inside your pocket. The method of calculating how many tokens one receives is rather complicated but 1 token is approximately one Euro. Besides your digital wallet, the app also provides a marketplace for retailers to offer their products or services you can buy with your tokens”. Scitepress.org details the financial and environmental impacts which Cycle4value offers and, no doubt, the current project in Austria will be closely watched by other cities globally as they, too, address the impact their cities have on climate change and what measures local authorities can introduce.

These are all good examples of the variety of ways in which Blockchain technology is being used to help local authorities and as there is better understanding about how to use this technology (and some of the initial concerns regarding security data and the ability of blockchains to be able to process large quantities of data are addressed) it is likely we will see many more use cases. A report from the Big Innovation Centre’s All Party Parliament Group (APPG) has summarised how Blockchain technology could be used, by saying: “Blockchain is one of the most innovative technologies considered in digital government strategies. Its benefits include:

 • Efficiency gains in any inter-governmental and public-private information exchanges and monetary transaction.

 • Reduction of bureaucracy and associated improvement in transparency and accountability in civic services.”

The use of Blockchain technology with other technologies such as Internet of Things, Artificial Intelligence are certainly proving to be ideal tools in helping local authorities handle the vast quantities of data currently held on their paper-based systems.