The payments eco system

Source: Insider Inteligence

Whilst you will no doubt recognise some of the organisations above, many are unlikely to be familiar. With increasing competition from a variety of companies, this is the conundrum that many banks face. Some argue that with the growing interest in Decentralised Finance (DeFi) another wave of change and competitors are on the horizon. Biznewspost claims: “The coronavirus pandemic accelerated payments industry digitization by two to three years, as lockdowns, restrictions, and ongoing consumer health concerns upended daily life in ways that trickled into spending trends and consumer habits.” Habits such as, ‘Buy Now Pay later’, have offered stiff competition for traditional banks as companies including Klarna (Europe’s biggest Unicorn valued at over $1billion ), Affirm, Afterpay, and even Paypal (having just paid $2.7billion for Paidy, a Brazilian buy-now-pay-later firm), are making it easier for shoppers to obtain credit as they spread the cost of buying over a few months.. According to CB Insights: “E-commerce software companies that support online retail have seen surging investment in 2021, with $12.4B raised in the first half of the year — a 51% jump from all of 2020”.

European FinTech Unicorns - firms worth $1billion+

Source: Sifted

According to CB Insights, there has been a tremendous growth in FinTech firms, with Europe now accounting for 25% of all 120 FinTech unicorns globally. A number of these FinTechs, and certainly many of the Payment platforms such as Google Pay, ApplePay (with 383million users), PayPal, Visa and Mastercard, are all accepting Digital Assets as payment. 

Payment platforms are preparing themselves for the inevitable issuance of digital currencies from Europe, the US, the UK and Japan, to name just a few, with one of the most established payment cards, Mastercard, having recently acquired a US-based business crypto intelligence firm, CyberTrace. Meanwhile on the whole, banks have largely fought shy of Digital Assets. Indeed, it still is the case that, apart from Clear Bank in the UK, it is extremely difficult for those organisations engaged in cryptocurrencies to even obtain a bank account. This is also true in much of Europe. In Australia however, as reported by TechWire Asia: “Approximately 17% of Australians own a cumulative AU$7 billion worth of cryptocurrency.” Volt, a neobank, has teamed up with a crypto exchange to enable clients to trade cryptos and, more importantly, hold/store them in their Volt account. This potentially means that Volt will be the first bank globally to be able to offer clients the ability to store Digital Assets and be protected by a nation’s bank deposit insurance compensation scheme.

Axie Infinity

Source: Axie Infinity.com

Axie Infinity describes itself as a "digital pet universe on the blockchain" where players look after their digital pets. However, in order to start playing, small digital animals called Axies need to be purchased. Ironically, the game (which was developed in Vietnam) has been dominated by people in the Philippines who make up 40% of the players. Now the Philippine government is also looking to profit as it seeks to levy tax on the gains its citizens are making. Due to the popularity of Axie, the price of Axies has risen immensely - meaning for those who cannot afford the initial purchase price, they are able to enrol for Axie scholarships at Axie Universities. A ‘scholarship’ in Axie Infinity is when an owner of Axies gives free Axies to someone, resulting in the original owner/donor earning a % of the players’ income. These types of scholarships are a helpful way for those people new to cryptos to learn how to use digital wallets and how to cash in the ‘Secret Love Points’ that one earns while playing Axie Infinity. Depending on the scholarship terms, the profit share can vary between having to pay away 30% to 40% of the income generated.

Another Play to Earn on-line game is Blankos Block Party, from Mithical games. Its developers also worked on highly successful video games including Call of Duty, World of Warcraft and Guitar Hero. When playing ‘Blankos, one can earn Non Fungible Tokens (NFTs) which can be traded on marketplaces. Rudy Koch, a co-founder of Blankos, has said: “What NFTs allow us to do is to bring the player into the economy so they can participate in the value that they bring to the game. Through the items that they earn, through the levels that they build, through the customizations that they make - they own the NFTs. They own the items, for the first time. And they can play with them, they can sell them.” Whilst the idea of buying and selling items you have won/earnt from playing on-line games is not new, the ownership and transparency that comes with Blockchain technology is. Burberry, the fashion designer and retailer has its Non-Fungible Token (NFT) collection on the Blankos Block Party. Rod Manley, chief marketing officer at Burberry, has stated: “That pushing boundaries through experimentation is at the heart of what the company does and it is excited to unlock genuine value for the gaming community by encouraging players to interact with the brand in an environment that celebrates art, design and exploration”.

Burberry’s collaboration with Block Party demonstrates how traditional global brands are engaging further with Digital Assets as a means in which to raise their profile among a new and growing audience which is paid to play.

The challenge is, how do consumers and travellers prove their vaccination status or their most recent test results? Whilst there is no definitive answer to this question, we are increasingly seeing a number of organisations turning to the use of Blockchain technology as the basis of a digital, transparent solution. Indeed, the World Economic Forum has proposed that for travellers to foreign countries “a ‘vaccine passport’ or ‘e-vaccination certification of compliance’ for border crossing regulations” could be required “to enable seamless border-crossing”. In Europe, the Digital Green Certificate, a digital certificate for travel available to cover anyone vaccinated against COVID-19 or those who have recently been tested and proved to be negative, is seen as a possible solution.

One of the first platforms to use Blockchain technology was by the International Chamber of Commerce and the world’s largest medical, security and travel repatriation firm, SOS. They launched AOK in May 2020, allowing users to keep control over their personal data whilst allowing them to share an authenticated digital copy of their COVID-19 compliance status certificate. IBM’s Digital Health Pass, using a Blockchain-powered platform, is now  integrated with Amadeus which, itself, is an airline booking system that is used by more than 450 carriers worldwide and means that your health and vaccination status can be securely stored and then shared when you book in at an airport. It seems that governments are pushing the responsibility for covid health and vaccination proof onto the airlines; in a similar way that it is the airline that checks to ensure you have the correct entry vias before you board a plane. Hong Kong University has teamed up with ConsenSys to build the Medoxie COVID-19 Digital Health Passport which will run on the Ethereum Blockchain. As reported on the website Business Blockchain, Karen Cohen, deputy chair for Blockchain Australia believes a blockchain-based COVID-19 certificate could pave the way for the protected circulation of health data worldwide, stating: “This would be a really wonderful test case as a globally secured way of sharing health data.”

However, the use of Blockchain technology is not without its challenges when it comes to using this technology to store and cryptographically share information, including issues such as:

• speed of the blockchain 

• cost to record data

• security of data - personal information will need to be hashed/stored in a manner such that the data could not be subsequently removed at a future time. There is very much the need to be mindful or privacy laws and regulations such as the General Data Protection Regulation (GDPR)

• close attention to the management of vaccine certifications and test results 

• the success of immunity and vaccine certifications will be largely dependent on the trust in the public authority which, in many countries, cannot be taken for granted. 

• vaccine passports could inadvertently lead to ‘false assurances’ for travellers and discriminate against those populations not having access to vaccines.

The existence of an internationally acceptable vaccine certificate, whether it be held on a blockchain or not, ought to reduce the levels of quarantine endured by travellers and allow more countries to open their boarders faster. Undoubtedly, this virus will be an integral part of our lives going forward, together with the possibility of being exposed to future pandemics. Having a way to prove your health status is almost certainly going to be in a digital format - be it on a blockchain or not.

The six biggest digital exchanges (excluding derivatives)

Source: Coingecko.com

The six largest Digital Asset exchanges all usually enjoy daily turnovers - i.e., reported to be buying and selling billions of US$ worth of transaction in 24 hours - which is impressive when you consider the number of Digital Assets they list is, at most, only 335. In terms of valuation of these exchanges, Coinbase is the only publicly quoted firm (having listed earlier this year) and is currently valued at $54 billion. Coinbase’s valuation is greater than that of the NASDAQ stock exchange, which itself is valued at $31.5billion. NASDAQ is the world’s second largest stock exchange in terms of the value of the companies that are listed on its exchange. When it first listed, Coinbase's valuation was almost as valuable as Goldman Sachs, yet it only employs 4% of the number of staff compared to Goldman Sachs. Notably, Coinbase has recently announced some very impressive trading results which has enabled its cash reserves to swell to $4.36billion.

It is understood that the crypto exchange, Kraken, is also considering an IPO (having seen the success of Coinbase’s listing) and it is thought that Kraken will look to float for $20billion. Kraken has 6 million investors and its COE, Jesse Powell, has told CNBC: “The first quarter just completely blew away the entirety of last year. We beat last year’s numbers by the end of February. The whole market has really just exploded”. Binance is the biggest Digital Asset exchange with its Binance token being worth over $70billion (although it had previously been valued at $100billion in May 2021). Whilst Binance has recently had to face some regulatory challenges in various jurisdictions, its US subsidiary has expressed a desire to become listed and raise $100m. Binance is another example of a Digital Asset platform which has become very profitable and yet it, too, only employs a fraction compared to other long-standing financial institutions. For example, back in 2018, Binance made a profit of $54million more than Deutsche Bank, with just 200 staff at Binance compared to Deutsche’s 100,000 employees.

The world’s 18 largest stock exchanges

Source: Statista.com

There are other exchanges, whilst not as large, which are attracting impressive valuation such as Naga AG, based in Germany, which continues to trade on a lofty PE of 170 compared to NASDAQ’s PE of 27.9. NAGA’s copy trading turnover grew by over 360% in the first half of 2021 compared to the previous year. Meanwhile in Asia, Indonesia's first regulated cryptocurrency exchange, TokoCrypto, is looking to list as a publicly traded company in the next two to three years, having made $10 million in profits in the first half of 2021. According to the publication Nikkei Asia: “Tokocrypto launched its token offering (TKO) on the Binance platform in May 2021. Around 200,000 people participated in the offering and committed around $4.2 billion, Tokocrypto said it holds approximately $1 billion worth of TKO tokens and has 800,000 users; it claims to acquire a new user every five seconds”. Even in India, where the regulatory outlook for trading Digital Assets is currently uncertain, the Digital Asset exchange, CoinDCX, has raised $90 million whereby giving the company a valuation of $1.1 billion. Although traditional stock exchanges seem less and less relevant to younger investors, what with their paper-based analogue services and systems, as opposed to Digital Asset exchanges which allow 24/7 dealing on mobile devices offering access to wide range of new assets there may, however, be winds of change in the air…….

In July 2020, the London Stock Exchange Group (LSEG) added 169 Stock Exchange Daily Official List (SEDOL) codes for a variety of cryptocurrencies, and has created three categories: digital currencies, digital platforms, and security tokens. The publication, Blockchain Nation, has reported LSEG’s Head of Data Solutions, James Nevin, as saying: “More LSEG customers have begun trading in the digital asset space due to the "gradual institutionalization" of digital assets; because of this, the LSEG thought it was the "appropriate time" to add them to SEDOL.” In theory, where there is most common ground between Digital Exchanges and traditional exchanges will be the trading of those Digital Assets deemed to be ‘security tokens’. Blockchain Nation’s article also highlighted the LSEG’s comment: “Concerning security tokens (XC), these assets are financial instruments in which decentralized properties are applied to financial contracts. The list includes 20 projects, among which the most prominent  

• Aragon (BMFHK65), 

• Decred (BMFHBR3), 

• Maker (BMFHD33), 

• Stratis (BMFHFZ9), 

• Peercoin (BMFHDW2).”

Historically, the LSEG has its roots starting in 1698 when a gentleman called John Castaing published “a list of currency, stock and commodity prices at Jonathan’s Coffee House including prices for gold, ducats, silver staters and pieces of eight.” Indeed, the LSEG is one exchange to keep an eye on when it comes to innovation and being a possible contender to embrace Digital Assets further. The current LSEG clearly has an agenda for change, being seen to not only to be listening to its clients and creating SEDOL codes for cryptocurrencies, but also by its $27billion acquisition of Refinitiv. LSEG has allowed a Digital Asset Exchange, AAX, to use the LSGE technology to power the AAX exchange. The LSEG has also recently announced an improvement in trading, having reported a rise in profits from £475million a year ago to $1.17billion. As Reuters has highlighted: “The CEO is trying to transform LSEG into a one-stop shop for data, trading and analytics with its $27 billion takeover of Refinitiv”. However, surely it cannot be lost on the LSEG board as regards the staggering profits and valuations now commanded by some of the digital exchanges. No doubt, the LSEG (along with other traditional exchanges) will want a ‘slice of the action’. As before mentioned, several digital exchanges employ a fraction of the staff compared to many traditional exchanges, yet these new digital exchanges have become hugely profitable and, in some cases, are attracting valuations which many traditional exchanges can only envy. 

So, will the Digital Asset exchanges use their highly rated valuations and surplus cash to buy into traditional exchanges and so gain greater credibility as well as the institutional support, or will the traditional exchanges begin buying up some of the smaller exchanges? Alternatively, will competition force the digital exchanges to be less profitable whereby we will see their fortunes waiver, or will even regulation curtail many of their current activities?

Seven ways Blockchain can help the environment

Source: Future Thinkers

The website, Future Thinkers, cites seven ways in which Blockchain technology is able to help improve our environment, and we have also given examples of various organisations in each category:

• Supply Chains - Provenance

• Recycling - Plastic bank

• Energy - Lo3nergy

• Environmental Treaties - Dr. Mike Troilo talks about Blockchain Technology and Sustainable Development

• Non-Profits - Charity digital

• Carbon Tax - IBM Blockchain Labs

• Changing Incentives - Smart key

Adelyn Zhou, from ChainLinks labs, recently wrote an article in an WEF publication explaining how smart contracts could help fight climate change and cope with its impact, giving three examples: 

i) Regenerative agriculture - incentivise communities around the world to reduce their carbon footprints through more sustainable land-use practices (usually a combination of planting trees and conservation) an example being, the Green World Campaign in collaboration with Cornell University’s Initiative for Cryptocurrencies and Contracts (IC3).

How smart contracts technology incentivises regenerative agricultural practices

Source: Chainlink Labs

ii) Conscious consumption - smart contracts can also empower environmentally conscious individuals and organisations. As an example, Blockchain-powered energy grids such as the Brooklyn Microgrid Project are using smart contracts to give consumers the ability to produce and trade solar electricity with their neighbours through an exchange which uses a blockchain as a coordination mechanism. 

iii) Hedging risk with crop insurance - farmers across the globe (the vast majority of whom are entirely uninsured) are especially vulnerable to changes in weather patterns, be it rainfall, drought, wind, and more. It is believed that 75% of agricultural risks remain uninsured, which has encouraged companies such as  Arbol and Etherisc to offer smart contract-powered crop insurance to farmers across the world.

It is not only the World Economic Forum that is supportive of Blockchain technology, but also the United Nations (UN): “The UN believes that blockchain, the technology lying behind these online currencies, could be of great benefit to those fighting the climate crisis, and help bring about a more sustainable global economy”. The UN has practical experience of working with blockchain projects, having been rolling out its Building Blocks in different countries. Building Blocks enables the UN to distribute money to refugees - directly, securely and quickly - without the need to go through a local bank. It has been successfully deployed in refugee camps in Jordan, enabling the UN to create an accurate on-line record of who has received what, and when. It is thought by the authors of a report commissioned by the UN environment agency, UNEP, that Blockchain technology could also improve the livelihoods of waste pickers, who eke out a living in the informal economy.

Looking back at 2017 and 2018, there was so much hope and promise as to how Blockchain technology could help the 1.8 billion unbanked globally as well as being a force for good to help improve our environment creating a cleaner, fairer economy by breaking down many of the existing ways of doing business. It is encouraging to see from some of the above examples it really would seem that the hopes and dreams of some of the early adopters and enthusiasts behind Blockchain technology are beginning to gather tangible evidence of how this technology is able to make a palpable difference!

DeFi enables owners of cryptocurrencies to earn interest and allows one to borrow, lend and buy insurance, or just speculatively trade. In effect, DeFi aims to offer owners of cryptocurrencies a range of services in a decentralised manner - typically offered by traditional financial markets which rely on centralised exchanges and clearing houses. Gartner believes that DeFi has 2 to 5 years before it reaches a plateau of productivity i.e., when the technology starts to enjoy mainstream adoption which, in reality, is not very long for a technology that could shake the foundations of the financial services sector.

       Hype cycle for Blockchain - July 2021

Source: Gartner.com

Meanwhile, by using smart contracts DeFi is looking ‘strip out’ much of the friction costs that accumulate due to the necessity of dealing with multiple intermediaries together with the need for audits and checks, regulatory compliance monitoring, and associated fees and costs - all of which stifle many existing traditional financial services today. Notably, Harvard Business Review cites a comparison between Yield Farming versus Foreign Currency Carry Trading: “The search for passive returns on crypto assets - “yield farming” - is already taking shape on a number of new lending platforms. Compound Labs has launched one of the biggest DeFi lending platforms, where users can now borrow and lend any cryptocurrency on a short-term basis at algorithmically determined rates. A prototypical yield farmer moves assets around pools on Compound, constantly chasing the pool offering the highest annual percentage yield (APY). Practically, it echoes a strategy in traditional finance - a foreign currency carry trade - where a trader seeks to borrow the currency charging a lower interest rate and lend the one offering a higher return. Crypto yield farming, however, offers more incentives. For instance, by depositing stablecoins into a digital account, investors would be rewarded in at least two ways. First, they receive the APY on their deposits. Second, and more importantly, certain protocols offer an additional subsidy, in the form of a new token, on top of the yield that it charges the borrower and pays to the lender”.

Interest in using DeFi lending has certainly increased as more people access pools of borrowing facilities, whether they be holders of Digital Assets looking to generate a yield on the Digital Assets they own or borrowers wishing to increase their exposure to this asset class. Forbes has described DeFi lending as: “Unlike with a traditional bank, borrowers using DeFi apps cannot be held accountable with physical assets if unable to effectively pay back a loan. DeFi applications are similar to smartphone applications, but they built with smart contracts”. CoinmarketCap, which tracks cryptocurrency prices in real-time, lists a variety of other lenders and DeFis apps where yield farming returns vary from 0.2% p.a to over 40%.

The three largest DeFi app lenders - Aave, Compound and MakerDao

Source: Dune Analytics @hagaetc

In turn, Harvard Business Review has proposed that: “DeFi offers a less volatile and more accessible point of entry than other markets - and may just have enough appeal to bring blockchain into the mainstream.” Should this prophetic statement be shown to be true, it is easy to understand, therefore, why DeFi could prove to be so attractive - not just for borrows and lenders, but so very disruptive for other sectors in the financial services industry. A combination of greater transparency, afforded by using Blockchain technology, and using smart contracts to eliminate human error ought to lead to more robust systems and procedures from which regulators, investors and service providers can benefit. The losers potentially will be the intermediaries, auditors, lawyers and compliance consulting firms which are currently so prevalent in the financial services sector. It is indeed a powerful and alluring prospect that DeFi offers the potential for lower transaction costs, greater transparency (so enhanced trust) and a more robust compliance infrastructure. If this proves to be the case and DeFi is, indeed, able to handle large volumes of transactions, then traditional financial services firms are likely to adopt this lower risk and alternative way of doing business or be forced to do so by regulators. 

One of the challenges that DeFi faces is that currently many of the DeFi services are built on the Ethereum blockchain and the price of transactions (gas fees) can mean that the costs outweigh the benefits. Ethereum is attempting to address the gas fees but for now DeFi is very reliant on Ethereum - so expect to see other DeFi platforms being created using other blockchains. Mathew McDermott, head of Digital Assets at Goldman Sachs, recently stated: “In the next five to 10 years, you could see a financial system where all assets and liabilities are native to a blockchain, with all transactions natively happening on chain. So, what you’re doing today in the physical world, you just do digitally, creating huge efficiencies. And that can be debt issuances, securitization, loan origination; essentially, you’ll have a digital financial markets ecosystem, the options are pretty vast.”

However, surely for mainstream adoption, regulators will search for some degree of accountability in the event of hacks or a DeFi app not delivering what has been promised. One possible solution is we could see regulators turning to the blockchain providers, such as Ethereum, and have them essentially act as gate keepers to vet the organisations which use their blockchains and build DeFi apps. Could we see Ethereum and other blockchains establishing some type of investor compensation scheme and furthermore the DeFi platforms (which run on their blockchains) be granted regulatory approval? Alternatively, will we see some traditional exchanges such as NASADAQ or the London Stock Exchange offer DeFi platforms, so regulators have a known entity to hold accountable? When asked for her thoughts, Dr Jane Thomason, from Novum Insights (a firm that specialises in analysing DeFi assets), responded: “"DeFi investors can lose money because activities are not regulated, moderated, intermediated, hosted or validated by a central authority, only driven by smart contracts. If the smart contract malfunctions, is hacked, or otherwise has a problem, there is no recourse. Who and what gets regulated? It’s a global 24/7, borderless market. Regulators need to get their thinking caps on and learn to audit code! This is a whole new ball game.”

The balance between totally decentralised systems and procedures where it may be difficult to hold an entity accountable in a particular jurisdiction (and so be able to recompense and protect investors) will need to be addressed. Increasingly, as our societies and lifestyles become more on-line and digital it is likely to present greater logistical challenges for regulators and governments to afford investor protection. What will not alter and may potentially be even more relevant surely is:

“Caveat emptor”

Let the buyer beware

Source: Staitisa.com

The impact of inflation is not confined to the $. Since its launch, the Euro has fallen in value by almost 33%. Hence the need to ensure that you have your investments in the long term, protected from the ravages of inflation in real assets. Yet despite this, many of us keep money in a bank?

Fall in the purchasing power of the Euro

Source: in2013dollars.com

Notwithstanding the impact of inflation, would it not be more accurate to refer to a fiat-backed digital currency as a pegged coin (as opposed to a stablecoin) since surely stability is a relative and not an absolute description? Digital currencies, backed by a fiat currency, arguably fall into two categories - Central Bank Digital Currencies (CBDC) or stablecoins (typically issued by non-government organisations). Regardless of what you call a digital currency, backed by $, £, €, CHF or Yen etc, there are a number of advantages and disadvantages surely worthy of consideration for digital currencies. Stablecoins were once dismissed as a way to store ‘ill-gotten gains’ when ‘crypto whales’ wanted to reduce their exposure to crypto currencies, and neither could access $ in a bank account nor wanted to deal with a traditional financial institution. Ironically, going forward we could see regulators being supportive of digital currencies and possibly insisting that issuers of income producing assets (such as equites and bonds) change the frequency of income payments. A stablecoin would enable customers to be treated ‘more fairly’ since stablecoins could facilitate digital equities and digital bonds to make income payments more frequently, e.g., weekly. The income due to an investor could be calculated based on the number of days a security has been held, as opposed to waiting for monthly coupons from bonds or six-monthly dividend payments. 

Another advantage of a digital currency is that it reduces the costs and time taken to remit money, as well as reducing the cost of money spent by tourists when overseas. This is likely to impact many of our readers who travel overseas or indeed run their own businesses, especially if they are trading with overseas suppliers and/or customers.

Size of retail cross boarder payments

Source: Bank of International Settlements

Challenges to be addressed:

• infrastructure - this is the technology behind digital currencies which is able to handle the volume of transactions

• potential environmental impact of some Blockchain technologies

• privacy of users

• interoperability - how will digital currencies be able to interact with cash?

• decentralised vs centralised technology - in a truly decentralised environment, if there is a problem, who is held to account: ‘Mr and Mrs Bitcoin’?

• those who prefer, or are only able to use cash - according the Bank of England, “Today, there are currently 1.2 million unbanked people in the UK, who by and large rely on cash and cannot access digital payments or can access them only at disproportionate cost”

• loss making - given current interest rates, stablecoins cost, not make, money.

Central Bank Digital Currency status

Source: CDBC Tracker

For an update on what different countries and their central banks are doing, please click here for a website which is regularly amended and which details the progress of various CBDCs.  

Possible use cases for stablecoins:

• payment of income - dividends, coupons, rent, income on structured products

• corporates - purely in-house to improve efficiency for corporate treasury departments

• collection and payment of insurance claims and premiums

• debt instruments - HSBC claims it is up to 90% cheaper to issue digital bonds using Blockchain technology; as more bonds are issued this way, how long before coupons are paid digitally? - €100m EIB bond, the World Bank Bondi Bond (two issues totalling AU$160m) 

• digital equities - Bitterex is offering exposure to Apple, Tesla; the Swiss are enabling the issue of digital equities, as opposed to paper-issued stocks (and thus the need for digital payments)

• new asset classes creating the need for digital settlement - DeFi, crypto, NFTs

• microfinance - a market expected to reach $313 billion by 2025, much of which will be via mobile devices 

• online market - $4.3 trillion, growing at 11.8% in the US 

• 1.7 billion unbanked - the World Economic Forum believes digital currencies can help the global unbanked; many of the 1.7 billion have no bank account but they do have a mobile phone

• Euro stablecoin - with monthly attestations by PwC for the French supermarket, Casino, as part of its customer loyalty plans

• Visa clients have spent $1billion of crypto in the first half of 2021

• Mastercard is to offer crypto payments using USDC

• in April 2019, Société Générale (via its subsidiary, FORGE) issued a digital bond of €100 million on a blockchain. Maybe we can get its London office to start issuing Sterling-based debt instruments, and the coupons’ income could be payable using a Sterling stablecoin

• Société Générale has also issued a digital structured product internally using a blockchain, and it intends to begin selling such products externally to wealth managers/IFAs in 2022. Many structured products are designed to pay an income so, again, there could be a need for a sterling version. As an aside, Bloomberg claims the total structured product market accounted for over $7 trillion in invested assets.

• HSBC claims it is 10 times more efficient to issue digital debt using blockchains, so why would it not then pay coupons digitally, via a stablecoin?

• DeFi sector offers access to EURt (Tether Euro stablecoin) for lending and borrowing but it can also be done by using Tether’s USDT. This is possible by using the DeFi app from Cream Finance. 

Number crypto currency holders globally

Source: Crypto.com

Therefore, the number of people holding Digital Assets could be far higher, and this ignores the daily raft of Non-Fungible Tokens (NFTs) being issued. For example, Reuters has reported that Open Seas (one of the most popular NFT exchanges) has seen the volume of NFTs traded on its exchange exceed $2billion in the first half of 2021. In June 2021 alone, Open Seas handled over $18 billion NFT trades valued at over $1billion. The types of assets being ‘wrapped’ in NFTs is very varied, as the chart below shows. 

of NFTs sold in various categories Jan -June 2021, on the Ethereum Blockchain 

Source: Non Fungible.com

We have highlighted this issue before, but could liquidity in the crypto markets prove to be too irresistible for institutions? Small and medium sized companies (small caps) which are quoted on stock markets around the world have typically been shunned by institutions and been mainly traded by specialist fund managers. Many larger institutions and wealth managers tend not to buy small cap shares directly but gain exposure to this asset class through specialist small cap funds. The reason often cited is the lack of liquidity of small caps therefore making it difficult to invest large sums into a small cap or, worse, not being able to sell small cap shares without substantially moving the price of the underlying shares.

However, there is growing evidence that even cryptocurrencies, which have a relatively small capitalisation, enjoy deep levels of liquidity. For example, it was reported last week that one of the world’s most famous footballers, Lionel Messi, is transferring from Barcelona to Paris St Germain and, as part of his renumeration, Messi is to be paid in PSG Fan Tokens. At the time Messi joined the French football club PSG Fan Tokens were valued at $24.37 with a market cap of $44,815,247. Following the official announcement of Messi’s transfer, the PSG Fan Tokens price climbed to a high of $61.23 increasing the tokens capitalisation to $56million, and the number of tokens traded exploded to almost $630million. Even in the last 24 hours, PSG Fan Tokens are trading at $32.87 and the volume of tokens traded in the last 24 hrs was $49million. With these levels of trading activity, it ought to provide sufficient liquidity for most institutions to buy and sell without adversely affecting the price. A word of caution though, as one needs to be careful about crypto trading volume data since those exchanges which report volumes are not regulated, and occasionally crypto trading can look higher than it really is due to wash trading. But more on this another time….

Another statistic worth keeping an eye on is the value of funds which are held in various Digital Asset Exchange traded products and mutual funds, as these are more accessible to private investors. Coinshares claims that such products now have almost $50 billion of assets undermanagement.

Digital Assets Exchange traded Products and Mutual funds net new assets ($million)

Source Coinshares.com

Unsurprisingly, it is difficult for asset managers to ignore earnings that have exploded by more than 16 times in July compared to June, which is exactly what the Axie Infinity token (Axie) did in July, generating $190 million in revenue. In June, Axie, with its Non-Fungible Token ‘pet’, demonstrated the opportunities which gaming firms offer by enabling gamers to earn as they play. The company’s game went viral in the Philippines where 60% of its gamers come from. Earning $110 a day playing Axie is a considerable sum in a country where the average income in a month is only $250.  Axie’s token price has risen from $3.6billion on 27th June 2021 to over $49billion on 27th July 2021. Performances such as this are difficult to ignore, especially when the turnover for Axie has ranged between $120million to $7.5 billion a day, according to Coingecko - phenomenal liquidity for such a new organisation offering institutional buyers the ability to trade reasonable positions.

Historically, investors had simply bought a crypto such as Bitcoin or Ethereum, possibly because they were the two largest and most actively traded cryptocurrencies. However, as evidence mounts that such a narrow ‘buy and hold’ strategy has underperformed other investment strategies, asset managers’ attention is turning elsewhere.

Crypto asset performance

Source: Aaro Capital

As pointed out in a recent article by London-based Digital Assets manager, Aaro Capital: “The above chart shows the compounded returns of the average cryptoasset fund against a buy-and-hold investment in BTC and ETH or a value-weighted portfolio based on the top 100 assets by market capitalisation. The left panel shows the compounded returns for the whole sample from March 2015 to June 2021. The red vertical line indicates February 2020, i.e., the initial stage of the COVID-19 outbreak. The right panel shows compounded returns for the sample starting in February 2020, that is, assuming the initial investment is made right before the outbreak of the COVID-19 pandemic”. 

A recent survey by Goldman Sachs found that 46% of family offices are interested in cryptos and, interestingly, it cites reasons including concerns about potential higher inflation rates in the future. Nadine Chakar at State Street would appear to sum up the current sentiment and explains a possible reason for the ongoing interest in cryptos “We are at a tipping point now where this is moving fast. We are getting calls from endowments and foundations that are getting donations in crypto and saying, what do we do with this? We are seeing companies that are thinking of adding crypto to their balance sheets. The growth in popularity of digital assets is showing no signs of a slowdown and State Street Digital is committed to continuing to build out the necessary infrastructure to further develop our digital assets servicing models to help meet our clients’ growing demands.” State Street is the US’s second oldest bank, with $3 trillion of assets under management and one of the world’s largest custodians globally. In the same vein, Sean Taor, head of European debt capital markets at Royal Bank of Canada, has reported: “I think blockchain has a real future in debt capital markets. If you can use blockchain from start to finish, you take out a lot of the costs, a lot of the risks in terms of counterparty and settlement risks.”

One sector attracting increasing institutional interest is Decentralised Finance (DeFi), especially for asset managers who are looking for income. Index Cooperative, with over $240million of assets under management, has created a number of Digital Asset indices, such the DeFi Pulse Index (DPI). The DPI is an index, similar to the FTSE 100, Nikkei 225 or the S&P 500 in that it enables investors to buy one token which, in turn, offers exposure to a portfolio of DeFi assets. Ratty Chief, investment officer at Man Group (one of the UK’s biggest fund managers with over $135billion) believes that machine-driven quant funds will continue to grow in importance as a way to manage assets. The NASDAQ has been working on ways to disseminate information, improve liquidity and trading of private (non-quoted companies) using Blockchain technology for a number of years. For over 2 years HSBC has been using Blockchain technology for $20billion of its client’s holding of private assets. Even International Swaps Derivative Association (ISDA) has written to the Financial Accounting Standards Board (FSAB) asking for cryptos accounting to be put on its agenda as demand for this asset class grows. As assets are digitised, it becomes easier for quant-based funds to gather more data and trade 24/7 in ways that historically were just not possible.

The growth in interest to trade and hold Digital Assets signifies that service providers, such as exchanges, banks, custodians, trustees, auditors, administrators etc, are being required to change their systems and procedures to be able to handle these assets on behalf of their asset management clients. This, in turn, is also encouraging Fintech firms such as Coinfirm, Copper, Alaco and Monsas to offer new Digital Asset services around payments, forensic investigation, custody, administration, AML etc. 

• “Regulators need to prepare for disruption by blockchain”. 
• Blockchain business models can reduce costs and make markets more transparent, but, as OECD's extensive policy work on blockchain shows, many new challenges will arise.
• Decentralised Finance" (DeFi) will emerge over the next decade, creating a parallel financial system operating on the internet. DeFi is revolutionary. It is the next frontier, definitely.
• The arrival of mainstream central financial institution digital currencies (CBDCs), which is able to allow DeFi, are maybe 5 years away
• With DeFi, there isn’t a friction. 
• You’re looking at replicating numerous current elements of banking it is inevitable that governments will have digital variations of paper cash, which can sit alongside non-public “stablecoins” (digital foreign money whose worth is pinned to an underlying fiat foreign money), to allow funds to settle reliably in actual time on blockchains”. 

This is not the first time that Medcraft has been outspoken and supportive of Blockchain technology. When he joined the OECD in 2018, he stated in the podcast The Blockchain revolution and power of positive distruption: “I see blockchain’s potential coming from its 3 key use cases: 

1. Secure transfer of value; 

2. Secure transfer of data; 

3. Cyber-security and privacy, provided by its distributed nature of nodes. 

Blockchain’s benefits for businesses include:

• Reducing the number of intermediaries needed for any type of transaction. 

• Improving the transparency and traceability of goods in the supply chain.

• Speeding up payments and reducing costs. 

• Increasing security and privacy of data and assets. 

• Improving access to markets and financing, particularly for SMEs. 

To this end, policymakers’ efforts should be guided by three objectives: 

i) To be pro-active and forward looking. This will help us avoid regulatory knee-jerk reactions and resist the temptation to jump in before we properly understand developments.

ii) To ensure regulators and policymakers keep up to date with the rapid changes brought about by new distributed ledger applications, and the need to build up their capacity to understand and deal with these innovations. 

iii) To ensure a coordinated approach on two fronts: First, working collaboratively with key stakeholders, including industry, academic and consumer groups. Second, internationally. The global nature and inter-connectedness of markets call for international co-operation to avoid regulatory fragmentation, curb incentives for regulatory arbitrage, and spread best practice.”

The importance and transformational impact that Blockchain technology is likely to have, and the importance that the OECD attaches to it, can been seen with three out of the four topics for the OECD 2021 Symposium on Digitalisation and Finance in Asia this autumn which are focused on the use of the technology:

24th September 2021

SESSION 1: Central Bank Digital Currencies (CBDC): latest developments and design considerations. SESSION 2: Artificial Intelligence (AI) in Finance.

1st October 2021

SESSION 3: Decentralised Finance. SESSION 4: Asset tokenisation: latest trends in policymaking.

Meanwhile in Australia, the government is clearly taking note of the potential disruption that Blockchain technology offers. The Digital Finance Co-operative Research Centre (which is comprised of over 20 members from the finance industry in Australia) has been selected to receive AU$60million from the Australian government in order to examine the digitisation of real-world assets such as equities, bonds, commodities and real estate.

However, there are undoubtedly challenges that need to be addressed in order for DeFi to realise its real potential. For example, a means by which to identify who is trading - that is, digital identity is required to efficiently function in a truly digital environment. Having digitised assets and created digital transparent platforms, and having removed many of the current intermediaries, investors will be able to trade 24/7. Blockchain-powered platforms will also enable compliance officers and regulators to view transactions and the ownership of assets, such as equities and bonds, in real time. Payments, too, will need to be digitised, hence the necessity for digital currencies, which possibly explains why we are seeing payment platforms such as Visa, Paypal and Mastercard embracing these new digital currencies. 

Unfortunately, many of the banks continue to turn their backs on the digital currencies as they cling onto their largely analogue, manual-based systems and procedures. It is therefore likely that the impetus for change and increased adoption of digital currencies, DeFi, tokenisation of real assets, etc, will now come, not from the cyberpunks who first advocated the use of Bitcoin et al nor the techies swooning over their latest ‘new new thing’, but from compliance departments and regulators. Indeed in Germany, DZ Bank and Bayern LB have started to trade an over-the-counter (OTC) interest rate derivative using Blockchain technology and smart contracts. This increased automation ought to lead to a reduction in counterparty risk. Furthermore, the DTCC (which processes $10 trillion in derivatives in the US) is aiming to launch its Blockchain-powered settlements platform in 2022. 

Real time transparency, reduced number of parties required in transactions (thus lower costs) coupled with the ability to use smart contracts and other technology to monitor and then report on an exceptions basis, as opposed to manually checking all transactions, is highly appealing. More importantly, regulators and compliance officers will be afforded more time on risk management, as opposed to ‘box ticking’, with the promise of lower costs but improved controls and stronger procedures.

The electricity cost to mine a Bitcoin

Source: Changelly.com

There is a widely held perception that Bitcoin mining has to be detrimental to the world’s environment because it uses more power than individual countries, although many do not realise that the tech sector alone accounts for 2-3 percent of all global carbon emissions according to the UN. Interestingly, while there have been concerns about the amount of electricity that cryptocurrencies such as Bitcoin use, we are now increasingly seeing alternative headlines such as: “Why Energy Concerns Around Blockchain May Be a Misconception”.

The electricity Bitcoin mining uses compared to other countries

Source: U.S. Energy Information Administration, Country Data, 2019 est. (or most recent available year)

Recently, US Federal Reserve Chairman, Jerome Powell, referred to Bitcoin as ‘essentially a substitute for gold rather than for the dollar’. If this becomes the case, we could see a significant increase in investors in Bitcoin and, as the chart below indicates, Bitcoin mining does actually use less energy than gold mining!

The amount of electricity used to mine Bitcoin v Gold in a year

Source: Cambridge University

Of importance is that the price of generating electricity from renewable sources is now often less than using fossil fuels. According to the International Renewables Energy Agency: “In the last ten years, the cost of electricity from utility-scale solar PV fell by 85 per cent, onshore wind by 56 per cent and 48 per cent for offshore wind”. However, the problem is that often renewable energy is generated in remote locations away from where any power is consumed; it is also being generated 24hrs a day including at night when electricity demand is usually at its lowest.

The cost of renewable energy is falling

Source: irena.com

This is where Bitcoin mining is able to help since, provided you have an internet connection, any surplus power can be utilised instead of being transported around a national grid or stored in still relatively inefficient batteries. Bitcoin mining offers an opportunity to wean the world off its fossil fuel dependency and transition over to using renewable energy sources by acting as a complementary technology for clean energy production and storage. An added benefit is that the more renewable energy plants there are, the lower the unit costs become due to economies of scale, whereby encouraging more investment into renewable energy projects and potentially bringing the marginal cost of producing electricity from renewable sources close to zero.

Contrary to popular belief, much of the energy required for Bitcoin mining comes from renewable energy sources such as wind, solar or hydroelectricity power plants. Because renewable energy projects can use surplus energy, they create at off peak demand to mine cryptocurrencies such as Bitcoin. This can then enhance the investment returns for a renewable energy project so encouraging further investment into other renewable energy projects. Bitcoin mining can act as a source of income for countries such as Iceland, Georgia, Russia, Venezuela because these countries have Bitcoin miners located in these jurisdictions 

Value of Bitcoins mined per day

Source: Ycharts.com

Historically, China has accounted for up to 60% of Bitcoin mining, generating over $7billion of income for the country p.a. However, due to recent action by the Chinese closing illegal Bitcoin mining operations, Chinese Bitcoin miners are now relocating to the US and Kazakhstan, (which generated over $650 million worth of Bitcoin in the last year). This means that fewer Bitcoins will be in the hands of one country i.e., China.

It seems that many traditional firms are also searching for staff. The US’s largest bank, JP Morgan (with assets of $3.2 trillion), is looking to hire staff in its Blockchain subsidiary, Onyx, which was launched back in October 2020. According to posts on LinkedIn, JP Morgan is looking for people in its auditing, marketing and engineering departments. It was not even a year ago that JP Morgan sold off its Blockchain busines, Quorum, to ConsenSys. This was followed, in April 2021, with JP Morgan along with Mastercard, UBS and other investors being part of a $65million fund raiser for Consensys. Visa recently reported that it had increased the number of “crypto partnerships” by 43% in these last four months to date as interest in cryptos continues to grow. Off the back of this, Visa is also looking to recruit more staff. Amazon is presently looking for a head of crypto payments on its website: “ You will leverage your domain expertise in Blockchain, Distributed Ledger, Central Bank Digital Currencies and Cryptocurrency to develop the case for the capabilities which should be developed, drive overall vision and product strategy, and gain leadership buy-in and investment for new capabilities”. Does this mean Amazon, as a company, is looking to invest in cryptocurrencies or start accepting cryptos as payment for goods? Binance has been searching for 350 staff globally with Zhao, its CEO, reporting to Bloomberg that: "We are hiring aggressively. We see the industry growing exponentially on a year-to-year basis, and we need to scale our team to cope with it." Furthermore, in the legal world it would seem that Tech Crunch’s headline, “the NFT craze will be a boon for lawyers”, appears to have been spot on. Specialist NFT lawyers have been inundated with new business enquiries from companies looking for regulatory and legal advice as they search how best to monetise their IP with NFTs. Charlie Kerrigan, partner at the law firm CMS, has recently commented: “NFTs are unusual because there has been such a strong uptake in a short time. We work with crypto firms and with sports, entertainment and other media firms and the level of interest and ingenuity were seeing is mindboggling. The projects are a good example of the skills modern lawyers require since they mix technical issues of regulation, IP and data alongside commercial advice, negotiation and project management. We have to listen well and be on our toes!” 

Many people in the past have complained that Blockchain and the digital assets it creates was simply ‘smoke and mirrors’ - in fact, the reality is totally different. Certainly, the above examples all clearly demonstrate a demand for those employees who can help firms ‘build-out’ their Blockchain plans. The cyberpunks who aspired to help the world’s 1.7 billion unbanked and by-pass the banks, regulators and stock markets have given way to quoted global multinationals and governments. Often well-known brands and long-established firms have realised that whilst they are not keen on crypto trading, the technology which underlines these digital assets (i.e., Blockchain) is able to address the real business challenges faced by both their customers, and themselves.

Furthermore, according to a 2020 American Productivity & Quality Center (APQC) survey of supply chain professionals, one of the biggest challenges when engaging with Blockchain technology solutions is finding staff with the right skill set. Well, it looks like this challenge is increasing, hence the demand for more education and practical help as opposed to the evangelical rantings claiming that Blockchains are a ‘silver bullet’! 

Top 5 Blockchain challenges

Source: Artnet.com

The Uffizi Gallery in Florence has also turned to issuing NFTs as a way to help raise money, given the dramatic loss of income caused by a lack of visitors due to COVID-19. The first NFT the Uffizi Gallery has teamed up with is Cinello, an Italian company which has patented a method to make a digital replications of paintings and has sold a Michelangelo painting, Doni Tondo, for €140,000. The entrance fee to visit the Uffizi is €27.50, so Michelangelo’s NFT has generated the same amount of income as would have over 5,000 visitors. Meanwhile in Uganda, one of Africa’s oldest museums, the Uganda National Museum, has teamed up with an IT firm called Murcom to sell NFTs based on some of the artifacts owned by the Ugandan museum. The selling of NFTs by museums does potentially raise the question of who is entitled to the proceeds, since many artifacts have been given to museums by wealthy benefactors. Although museums are permitted to display the art, are they able to keep the initial and, indeed, the potential on-going income that NFTs can generate. 

It is not only museums which have been active with NFTs - the major auction houses have joined the NFT craze. Sotheby’s held an auction at the beginning of June 2021 comprising only of NFTs, called ‘Natively Digital: A Curated NFT Sale’. The Sotheby auction raised over $17million, with one NFT, ‘CyberPunk, being sold for over $11million whereby indicating the clear interest regarding this new digital art. However, as yet, the most paid for an NFT was at a Christie’s auction where a digital collage of 5,000 images created by an artist known as Beeple sold for $69m. On LinkedIn, Carl Kirchoff recently commented on a post that: “Knowing a bit about blockchain and collectibles, NFT can make you a lot of money when you run an exchange (same as crypto). The artists though - as always - will not be able to monetize their content as they still depend on other platforms. But I am certain, whenever there is a goldrush, people with shovels are near”. However, the situation this time may be different as NFTs are allowing the owners of IP i.e., photographers, musicians, artists, museums, galleries etc, to, in effect, sell a digital version of the items they own and/or have created. Interestingly, they can earn an income, almost like a royalty, every time the NFT is resold again and again and again, thanks to the exchanges. 

This new interest in digital art in the form of NFTs has certainly sparked renewed interest in the art world at large, and there would appear to be genuine enthusiasm for collecting and engaging with art in digital spaces. This has led to the creation of digital galleries such as LIKELIKE and the Virtual Online Museum of Art (VOMA). NFTs also offer the opportunity for museums to digitally display more of their rare collections which are usually locked away in vaults. According to the New York Times, as few as 2% of a museums’ collection may be on display at any one time: “The Metropolitan Museum of Art in New York, for example, owns two million objects and displays only tens of thousands at a time. At the Museum of Fine Arts in Boston, 18,000 objects are on display at any one time, of 450,000 in inventory”, thus illustrating how Blockchain technology is able to, once again, bring greater transparency. The establishment of digital art NFT collections is not only able to create additional income but offers money for museums to enable digital accessibility of artifacts which were once lost or hidden from public view. 

However, there are some possible regulatory challenges of which galleries and museums need to be mindful, such as the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLRs). As of 10th January 2020, the MLR require those engaged in the art market for any purchases and/or storage of “works of art” valued at €10,000 to comply . Unfortunately, MLR regulations did not foresee the advent of NFTs since it has interpreted “works of art” by relying on the definition outlined in the Value Added Tax (VAT) Act 1994. Its definition of artwork includes only various categories of pieces “executed by hand” - e.g., paintings, drawings, engravings, lithographs, sculptures, tapestries, ceramics, copper enamels and photographs. Many will argue that NFTs fall within the ‘spirit’ of the VAT Act’s definition of art since NFTs are not included in the formal definition, so lack legal and potential regulatory clarity. This leads to a further challenge in that, are NFTs a crypto asset? If they are, then the buying and selling of such assets mean that art galleries and museums in the UK are required to register with the FCA. Furthermore, MLR cover those firms and individuals involved in the exchanging “cryptoassets for money or money for cryptoassets” so, if NFTs are indeed crypto assets then art galleries and museums will need to cease selling NFTs until they are on the FCA crypto register.

Neither antiques traders, wine merchants, real estate agents nor classic car garages nor auction houses that sell trade these asset are regulated, nor do they need to be, yet many of the assets they sell are used as store of value. However, those who trade these assets are obliged to comply with money laundering regulations. We have already seen NFTs being created backed by classic cars and antiques and Mattereum, with its Real World Asset tokenisation initiative, is currently offering an NFT of a Palaeolithic hand axe that is claimed to be 350,000 years old. Dr James Hester, Mattereum’s Head of Ontology and former Tower of London curator has said: “The art and antiquities trade has always been cautious about adopting new technologies too quickly. While there has been interest in the Mattereum Asset Passport among art dealers and galleries, there is also a reluctance to be the first over the top. Onboarding these artefacts will show that the process differs very little from existing documenting procedures. The main differences are that this information will now be stored in the permanent, immutable blockchain, and that the object’s corresponding NFT allows an unprecedented level of liquidity of stock. Furthermore, as Certifiers of information in the Asset Passport, they generate an ongoing income in exchange for warranting that information long after the piece has left their shop".

Growth of crypto funds

Source: Crypto Fund Research

A crypto fund will need a custodian who is, in effect, responsible for ensuring that the assets in the fund are kept secure. Institutional investors pay close attention to the calibre of the custodian and look to them to ensure the capital they invest is safely held, and subject to strict procedures as to who is able to get access to the money in the fund. A selection of some organisations which offer crypto custody include:

Anchorage

Bitgo  

Coinbase Custody

Copper

Gemini

Kingdom Trust 

Monsas

Fidelity

PrimeTrust

Fireblocks

Selection of crypto custodians

Source: Bitcoin Market Journal

The role of a custodian may now potentially be challenged due to the fact that Blockchain technology has brought about the development of Multi-Party Computation (MPC) which, itself, enables assets to be stored in multiple locations by a variety parties. This means that those custody firms which use MPC never have complete control of the assets and therefore do not need to be regulated and subject to the costs of insurance etc. As well as a custodian, crypto funds will usually use third party fund administrators who are responsible for calculating a fund’s value and will prepare investment reports for investors to monitor the activity of the fund in terms of performance and the assets that have been traded. Furthermore, the fund administrator is the one who prepares the fund’s financial statements. Here is a selection of crypto fund administrators:

AKJ

Copper

MG Stover

Northern Trust

NAV Consulting 

Theorem

As regards funds, there are two types for which asset managers can offer their services. A fund can be ‘open ended’ i.e., the size of the fund will increase or decrease depending on the number of investors who wish to buy or sell a fund. With this type, the fund manager calculates the net asset value (NAV) of the fund and then divides this by the number of units/shares/tokens in the fund. If someone wishes to buy into the fund, then more units will be issued at the price of the units based on the most up-to-date NAV. Alternatively, a fund may be ‘closed’. In this case, the fund manager initially raises a sum of capital and the monies are invested. If there are new investors who wish to gain exposure to the fund, then the fund price can trade at a premium to its NAV. If there are more sellers than buyers, then the fund’s price will trade at a discount to the NAV of the fund. The advantage of a closed ended fund is that the asset manager is not forced by investors to be required to liquidate/sell some of the holdings to meet redemptions. The disadvantage is that if the fund performs really well the asset manager is unable to easily expand the amount of money that he/she manages.

Source: Blockchain news

Looking further ahead, Anthony Hopkins is due to star in a film called Zero Contact which is to be distributed as an NFT, thus allowing viewers to own their copy of the film whilst also preventing those who do not own the NFT from watching it. NFTs are being used as a way to prevent film piracy, which is a major problem in the film industry. Each NFT is to be, in effect, a digital asset with a unique serial number that will be encrypted and stored on a Blockchain. 

Filmio. Inc., in San Diego, uses a Blockchain-based platform which enables film creators to upload their projects and market them to an audience which can vote on what they like, as well as allowing investors to check fan engagement and, hence, decide if they would like to finance the film or not. The ability for creators, investors, and the audience, to be on the same platform means it is possible to create a transparent way in which to nurture new talent and content and to distribute films and shows, all the while retrieving feedback in real time. It also offers the potential to raise funds from a new range of potential backers, as opposed to the current system which, historically, has relied heavily on a handful of studios and media moguls.

Blockchain technology seems to be disrupting many different industries and the film and entertainment industry looks set to be impacted, too. Indeed, the US bank, JP Morgan, believes that Blockchain technology is likely to effect the media and entertainment sector in fours ways, these being:

i)micropayments for content - as we see an increase in media behind subscription-based paywalls, there are likely to be consumers who will not pay a monthly subscription but would pay to view specific events or films. A Blockchain-powered platform, with the ability to keep a transparent record of its data, could allow for more accurate tracking of when and how copyrighted content is watched. A micropayment pricing model would normally be inefficient to implement, but its execution could be fully automated and cost-effective with blockchain, possibly using digital payments to cut out banking fees etc.

ii) the elimination of content aggregation - Blockchain technology could enable artists, such as musicians or writers, to distribute their work directly to consumers. The ability to bypass and disintermediate agents, managers etc, would therefore allow for a greater % of the revenue spent by consumers to be received by the creators themselves. This could impact everyone, from large media houses to independent bloggers, whereby helping artists form a direct relationship with consumers.

iii) royalty distribution - one of the most powerful features that blockchain platforms can offer is greater transparency, undoubtedly assisting in the collection and distribution of royalty payments in the music business which have only become more complex and opaquer with the growth of music streaming services such as Spotify, Apple Music, SoundCloud and Tidal. The top ten music streaming platforms alone have more than 250 million monthly customers. For instance, each time a song is streamed online or played in the background of a TV show the distributor must compensate the music’s copyright holder. Unsurprisingly, disputes can arise over the accuracy and compensation rates of such royalties. Certainly, smart contracts could automate much of the process of tracking and paying of relevant royalties that are due so allowing for more accurate tracking of a song’s usage, quicker royalty payments and more transparency over contract terms and the division of revenue among artists and other stakeholders. Smart contracts could also disrupt or eliminate the role of copyright collection associations which currently act as centralised intermediaries in gathering payments for rights holders.

iv) consumer-to-consumer sales - back in 1999, Napster was not dissimilar to a Blockchain-powered platform in that it allowed peer-to-peer transactions (all be it that Napster was closed down). However, Blockchain technology could empower other types of content owners to retain better oversight of their copyrighted material. Illegal peer-to-peer file sharing of television shows, movies or other content is already common, but file sharing could become a legitimate practice with the ability to be controlled and monetised. For example, content owners could track and charge a fee for any distribution which had resulted from a consumer purchasing or subscribing to Blockchain-hosted content and then sharing it with a friend. This would also create an additional revenue stream for content creators and provide better transparency on how copyrighted assets are consumed and shared.

Source: Rarible.com

As if this were not enough, the film industry is now looking at NFTs and how they can be used to help finance projects. The 1963 film, Charade (starring Cary Grant and Audrey Hepburn) claims it is the first film to be sold as an NFT. Film finance firm, The Forest Road Company, has just raised a $20 million fund to make pre-production investments in exchange for the right to sell associated collectibles using NFTs. The Brits are not to be outdone as, due to be released in a exclusive preview screening at the Odeon in Leicester Square on 10 th September 2021, is Slammer. The writer/director of this sci-fi all-Brit thriller, Ted Byron

Baybutt, has been quoted as saying: “I wrote the first draft of Slammer when Bitcoin was a

mere $11.57, as tracked by the protagonist in my film - it has increased somewhat since!

One of the other key characters has had huge financial success and therefore accumulated

power and control through being a pioneer in the areas of blockchain and cryptocurrencies.

It is his desire for change through technology which drives much of the action in the film.

Slammer was co-funded by cryptocurrency and we are exploring the exciting possibilities of

NFT in relation to our marketing events.”

           Source: Payments cards and mobile.com                                           Source: Visual Capitalist.com                    

However, the pace of change in banking had arguably been given a major boost due to the impact of open banking initiatives which, again, began first in the UK in 2018 and is now being adopted worldwide. The Open Banking Organisation defines open banking as “a secure way to give providers access to your financial information. It opens the way to new products and services that could help customers and small to medium-sized businesses get a better deal. It could also give you a more detailed understanding of your accounts, and help you find new ways to make the most of your money”. So, potentially open banking could be seen to be emerging as a huge disruptor for banks since it offers customers access to a greater choice of financial products and services; this also helps to explain the rise of so many fintech firms.

Accenture has recently highlighted in a report on open banking that: 

• “ the global open banking waters are relatively calm right now, but beyond the horizon a wave of change is building.

• banks will soon need to choose between catching this wave or riding it out and hoping for minimal damage - up to $416 billion in revenue is at stake.

• open banking will arrive at different times in different markets but when it takes off, growth will likely be rapid - sceptics may be left behind.

• tomorrow’s open banking leaders will prioritise data custodianship, analytics mastery, agile partnerships, and trusted security.”

There exists a very wide selection of open banking platforms and some have become extremely successful. For example, Klarna is thought to be Europe’s most valuable start up and worth over €31billion. It is interesting to see recently that it was the payments platform, Visa, not a bank, which acquired the Swedish firm, Tink, for €1.8 billion. Visa had been disallowed by the Justice Department to acquire US-based Plaid in January 2021 for $5.3 billion . At the time it was thought that Plaid would pursue a public listing. Plaid is now estimated to be valued at $13+billion, therefore will we see a bank attempt to acquire Plaid before it lists or will a bank make a bid before it is purchased by another fintech?

Achieve open banking platform rankings 2021

Source: Achieve Consulting.com

Furthermore, as the publication the Entreprenuer has highlighted, banks face a number of challenges including:

• legacy systems - designed over a decade ago and unable to adapt to today’s connected digital environment

• deep silos - banks have long been siloed organisations, driven by design and regulations

• customer evolution - fast-changing behaviour of today’s socially connected, digital, next-gen consumer

• compliance demands - growing compliance and costs spurred by many post-recession regulatory mandates.

Interestingly, Blockchain technology offers open banking platforms and banks some potential solutions and a foundation for a new digital financial system. Blockchain-powered platforms allow a new digital financial ecosystem by layering distributed ledger technology on top of what were originally analogue, paper-based legacy banking APIs, whereby enabling third parties to interact securely with banks and their data without directly accessing the core banking systems. Financial institutions can use such platforms to transact securely with each other (in what is, after all, a trust-less environment), sharing information and connecting different parties so as to create more robust and decentralised networks on a shared platform in a much more collaborative manner. Since Blockchain technology relies on securing information in a cryptographic basis and can hold information on a decentralised basis, it can reduce the chance of hacking whilst equally improving financial institutions’ disaster recovery plans and infrastructure. It is possible for customers’ data to be categorised, such as highly classified and private customer data, bank sensitive data, third party use data and general public data - all managed in various blockchains. Access and disclosure for each category can be programmed using smart contracts, thus enhancing data protection and minimising security risks, and allowing the customers much greater control over their information. Smart contracts can empower customers so that they, themselves, decide who has access to what data, when, and for how long. 

The blockchain-powered platforms used enable aggregation and storage of data that can be relied upon to develop new products and services such as loans, investment packages and pension plans, etc - bespoke for a customer’s financial status. Hence, Blockchain technology lends itself to be very appealing for open banking as it only allows access to pre-approved data in a secure, auditable and non-intrusive manner. Understandably, this improves trust and enables banks to only share the requisite information without compromising user privacy and data security. Furthermore, by hashing data (i.e., by encoding the information) it prevents unauthorised users from reading data that is stored in this unreadable format.

i) Nudges never force people to make certain decisions - a core principle is that, while ‘nudges’ may lead people in a certain direction, they never limit or eliminate options. The ultimate choice still lies with the person and in this way a ‘nudge’ is different from a rule or a law. 

ii) Nudges leverage behavioural science insights about how we make decisions - ‘nudges’ are effective because they draw on mental shortcuts and cognitive and emotional biases which impact our behaviour. For example, ‘Save More Tomorrow’ works because it asks people to make a savings commitment in the future, i.e., when they get a pay rise in the future. 

iii) Nudges are meant to be used for good - ‘nudges’ are meant to help us move from intent to action, rather than convincing or persuading us to do something that we had no intention of doing.

Swiss Re’s Behavioural Research Unit, based on more than 500 client engagements, has identified five main areas for behavioural economics to create value along the insurance value chain. Swiss Re saw a 20% increase in sales, 3% rise in underwriting disclosure, up to 10% reduction in ‘claim padding’ and 3% reduction in cancellations. 

Top 5 areas behavioural economics is creating value for insurance

Source: Daily Fintech

Earlier this year, an academic paper published by Cornell University in the US, “Tokenising behaviour change: optimising blockchain technology for sustainable transport interventions” looked at how Blockchain technology and tokens could be used to influence behaviour and be a tool to help firms and society to be more ESG-compliant. The research paper examined four projects which use Blockchain technology to try and increase individuals’ adoption of sustainable transport by encouraging people to cycle and walk more.

Projects designed to increase the number of walking journeys and or cycling

Source:  Tokenising behaviour change: optimising blockchain technology for sustainable transport interventions

This research paper concluded: “Blockchain technology can provide a technical infrastructure capable of facilitating different designs and implementations of tokenised economies to support conversion of journeys to sustainable travel behaviour. However, blockchain technology is just a part of the technical solution, which is reliant on evidence from external sources such as smartphone apps and supporting services that are capable of making informed and accurate judgements on distances users have travelled, whilst balancing motives of data gathering and protection of user privacy. New possibilities brought about by blockchain technology, from autonomous, and individually tailored, programmatic actions of smart contracts and the potential of DeFi to bring liquidity to token economies, offer a tantalising future for delivering engaging programmes to aid travellers in make sustainable choices”.

• “Interoperability should be enabled between CBDC systems of different jurisdictions and exchange;

• Information flow and fund flows should be synchronised so as to facilitate regulators to monitor the transactions for compliance;

• A scalable and overseen foreign exchange platform supported by DLT (distributed ledger technology like blockchain) or other technologies.”

China’s use of mobile payments leads the world

Source: Statista.com

It may or may not be related, but the Chinese Banking and Insurance Regulatory Commission has introduced new regulations on the $1.15 trillion cash management products in China. Will the next overture for China be to ask for a % of these massive savings to be transferred to its new CBDC?

Meanwhile, the Guardian newspaper has reported: “The Basel Committee on Banking Supervision, which consists of regulators from the world’s leading financial centres, is proposing a “new conservative prudential treatment” for crypto-assets that would force banks to put aside enough capital to cover 100% of potential losses.”. Stablecoins, pegged to a country’s official currency, would not be subject to the same strict rules as they are deemed to be more akin to traditional assets such as bonds, loans, deposits, equities or commodities. As reported in the Herald of Scotland , Britain continues a relentless march for using less and less cash with the number of cash payments dropping by 35% in a year - only 20% of payments now involve notes or coins, as opposed to 50%+ ten years ago.

The Fed, the ECB and the Bank of England have all declared that they are investigating the potential of CBDC, but one cannot help wondering what powerful lobbying is occurring behind the scenes by those banks desperate to maintain the status quo which has served them so well to date. Bizarrely, many Western governments and their regulators seem fixated that Digital Assets will continue to offer money launderers a panacea to enable them to make payments, whereby ‘oiling the wheels’ of illicit activities. This recent argument by a Dutch official, as reported in Cointelegraph, is such an example: “Ban Bitcoin because it doesn’t meet any of the three functions of money and is handy for criminals”. Such concerns are understandable given the rise in cyber attacks and ransom demands, often with the ultimatum for payment to be in cryptos e.g., the Colonial Pipeline which resulted in a payment of $4.4million Bitcoin. However, there could well be signs that demanding cryptos as a form of payment may not be such a panacea for criminals. In the US, the Fed has succeeded in retrieving $2.3 million of the Bitcoins paid by the owners of the Colonial Pipeline, thus sending a warning shot across the bows of the perpetrators of ransom that they may be better off reverting to demanding suitcases of cash, diamonds or gold as they have done in the past!  Then again, the banks and those who regulate them know a thing or two about deficient Anti Money Laundering (AML) procedures and checks as, in the first quarter of 2021 alone, banks where fined over $1.25 billion for AML transgressions.

Unsurprisingly, the adoption of Digital Assets is growing with over 10 million people already owning this asset class - up 55% from last year. Subsequently, TheCityUK, a lobbying group for Britain's financial services sector, is hankering for the UK to introduce regulation for the cryptocurrency sector. TheCityUK believes the UK could influence global policy by establishing guidance for regulating cryptos and thus attract businesses to the UK by offering legal certainty. Miles Celic, chief executive of TheCityUK, recently said: "There is a fierce global race underway to see which applications of DLT [distributed ledger technology] and cryptoassets will win out, and who will grab the biggest slice of the value they promise. The ultimate winner is for markets to decide, but government and regulators have an important part to play. They must set safe and robust rules for this burgeoning sector – while ensuring they don’t inadvertently squash good ideas before they can mature and flourish."

So, whilst China pushes forward and extends its already sizable lead when it comes to making payments digitally, much of the rest of the world is struggling to set rules and regulations - pontificating instead, as opposed to acting more decisively.

Here is just a small selection of different companies offering Blockchain-powered solutions within the healthcare sector:

Blockpharma, based in France, offers a Blockchain-powered platform to address challenges in the supply chain for pharmaceuticals to bring greater transparency, thus enabling drugs firms to help tackle the relentless counterfeiting that is so prevalent in the pharmaceutical industry. By scanning the supply chain and confirming all points of shipping, the Blockpharma’s app has the ability to track and trace drugs from point of manufacture to dispensing, so helping medical prescribers and patients to identify counterfeit medication. According to Blockpharma, 800,000 deaths occur every year due to counterfeit medicines, and there has been a 300% increase in counterfeit medicine trafficking between 2007 and 2010. Out of all the medication in circulation at the moment, 15% is counterfeit.

BloodFlow is a Canadian-based firm using Blockchain technology to offer the 36 blood donation agencies globally a combination of rewards/tokens together with a more efficient way for these agencies to digitally engage with blood doners, including information about what their donated blood was used for. For example, the blood you donated was used to help a child who was involved in a traffic accident, or your donated blood was used to help someone who has had hip replacement surgery. This enhanced engagement encourages blood donors to return to give blood - of paramount importance since many of the world blood donation agencies are desperate for more donors and also wish to reduce the % of donors who do not attend to give blood even though they have made an appointment. Did you realise that while donors are offered cup of tea following donation of a unit of their blood, the blood agencies then sell that unit of blood for $200-$300 in the US and in the UK, the NHS pays £145.22 per unit of blood? 

Coral Healthcare, based in Canada, is using Blockchain technology with smart contracts to improve the efficiency of healthcare, whilst automating many of the current paper-based, administrative healthcare systems. This is enabling doctors, scientists, lab technicians and public health authorities to access one common data base, so reducing duplication and errors.

Medicalchain, based in the UK, is using Blockchain technology to hold patient records securely. Doctors, hospitals and laboratories can all request patient information which has a record of origin and the technology protects the patient's identity from outside sources. In May 2018, Medicalchain announced the release of MyClinic.com which is a telemedicine platform allowing patients to consult with their doctors via video and pay for those consultations with 'MedTokens.'

Robomed, based in Russia, combines AI and Blockchain technology interacting with wearables to monitor a patient’s vital signs e.g., pulse, temperature, blood pressure etc. Robomed has developed chatbots (wearable diagnostic tools and telemedicine sessions) to gather patient information and share it with the patient’s medical healthcare workers. Robomed also uses smart contracts that incentivise patients and prompts them to be healthier. The Taipei Medical University Hospital has recently implemented Robomed's technology to store and share medical records more securely.

Veridat, in the US, is a business established to bring integrity and data hygiene to the pharmaceuticals industry. Pharmaceutical clinical research has been plagued with questions of trust and transparency regarding the results of trials and testing which generate huge amounts of data and can have a substantial impact on the prospects of the company being given approval for the use of its drugs. By using Blockchain technology to timestamp and record clinical research data, Veridat offers auditability and trust and is being trialled with JuvaTech, a behavioural neuroscience company supporting researchers conducting testing of therapeutics.

Comparison of traditional, centralised, and blockchain supported telehealth and telemedicine systems

Source: US National Library of Medicine

It is not solely companies around the world which are championing the use of Blockchain technology in the healthcare sector - countries, too, have embraced this technology. In 2016, the Estonian E-Health Foundation launched a Blockchain-powered project designed to keep patient medical records safe but accessible by those who had permission and the need to use such information when caring for a patient. “We are using blockchain as an additional layer of security to help us ensure the integrity of health records. Privacy and integrity of healthcare information are a top priority for the government, and we are happy to work with innovative technologies like the Blockchain to make sure our records are kept safe,” Artur Novek, the foundation’s Implementation Manager and Architect has reported.

Estonia has found some the key advantages of using Blockchain technology to be:

• healthcare workers have unlimited access to the patient’s information once they have been given the relevant permissions

• the information is immutable and cannot be tampered with, so hackers cannot make any changes to information.

• a huge volume of records can be put under a secured ledger and then shared digitally, thus removing the need for physical, paper-based records.

• patients can have control over whom has access to their data.

However, as with any technology there are, without doubt, challenges that still need to be met when it comes to using Blockchain technology. Apart from the natural reluctance to accept change there are the financial costs of implementing any new technology solution and transferring huge amounts of data in a secure way to a new system. Concerns always exist as to how secure the data is when digitised, together with the challenge of interoperability i.e., the ability of a Blockchain platform to be able to integrate with other Blockchain-powered platforms, as well as other data records which are not using Blockchain technology