G7 Report on Cryptocurrency: Big Banks worried that Big Tech will eat their lunch?

A few days ago the BIS published "Investigating the impactof global stablecoins". The report was authored by the G7 Working Group on Stablecoins.

What are stablecoins? 

The report defines stablecoins as follows:

"Stablecoins have many of the features of cryptoassets but seek to stabilise the price of the “coin” by linking its value to that of a pool of assets."

Previously, I had noted that the US could possibly use stablecoins, such as Facebook's Libre, to support its foreign policy against China. In the post I noted that:

"The US government could leverage Facebook's offering. As noted in Paul Vigna's and Michael Casey's Age of Cryptocurrency:

"Things really get interesting when the U.S. government issues a digital dollar. The dollar is already the world’s primary reserve and commercial currency, but this would give it an even bigger edge. That’s because people in countries whose currencies aren’t trusted or who are barred or restricted from buying foreign currencies—think China, Argentina, Russia—could now easily obtain the one currency that has long symbolized international stability. Whereas the international movement of paper dollars can be (somewhat) controlled with physical checks at border crossings and regulation of bank transfers, digital dollars would be far more footloose. They would invade other jurisdictions’ currency zones. If citizens of other countries can easily acquire dollars—by far the most sought-after currency in the world—and use them to buy almost anything, why would they need renminbi or pesos or rubles? In this scenario, other currencies become less sought after, the dollar more powerful. It is the ultimate expression of U.S. hegemony, and, for other governments, undermines their nation-state sovereignty."

In other words, China, China, China.

That is, Facebook's deployment of the cryptocurrency gives the US government plausible deniability that the US is working to undermine the Chinese from a currency perspective. As I noted in this post, I cited the Wall Street Journal in explaining China's concern regarding cryptocurrency.

"Virtual currencies in theory allow holders to bypass China’s traditional banking system to move money outside its capital-controlled borders. That could make it more difficult for Chinese regulators to maintain a tight grip on the yuan."

The G7 report in another evidence to support this hypothesis as China is not included in the working group, despite the fact it is a leader in mobile payment technology. 

That being said, the bigger takeaway from the report is that the Big Banks seem to be sensing how Facebook and other Big Tech Companies (Annex B of the report analyzes the capabilities of Facebook, Amazon and others to transmit payments) could be encroaching on their turf. What Annex B doesn't mention, is that "the largest corporate stockpiles are all in the tech sector: the top five hold a collective $601 billion."

Tech companies in Canada, like Rogers, have already been granted a banking license. In other words,  it is a matter of legislators pen to grant such licenses to big tech, who can turn the billions in cash into trillions of loans through fractional reserve banking.

Finally, we should always keep in mind that the rentier economy is more lucrative than actually making products or delivering services. Perhaps the biggest illustration of this is how Sony makes 63% of its operating profits from finance with “[l]ife insurance has been its biggest moneymaker over the last decade, earning the company 933 billion yen ($9.07 billion)”.

Where are the Big Banks especially vulnerable?  

In the report, the Working Group notes that "cross-border payments remain slow, expensive and opaque, especially for retail payments such as remittances. Moreover, there are 1.7 billion people globally who are unbanked or underserved with respect to financial services" and more specifically "Recent stablecoin initiatives have highlighted these shortcomings and emphasised the importance of improving the access to financial services and cross-border retail payments. In principle, retail stablecoins could enable a wide range of payments and serve as a gateway to other financial services. In doing so, they could replicate the role of transaction accounts, which are a stepping stone to broader financial inclusion. Stablecoin initiatives also have the potential to increase competition by challenging the market dominance of incumbent financial institutions." [Emphasis Added]

What about regulation? 
Regulation is inescapable, but not an insurmountable task. That being said, the emphasis in the report on the need for regulation needs to be viewed with a bit of skepticism when it comes to competition. Andrew Hilton, director of the Centre for the Study of Financial Innovation, told that Guardian that "Big banks like regulation. Regulation is a fixed cost, so the bigger you are, the more clout you have to amortise [spread] it over. It favours the big over the small, and is another row of bricks in the wall that keeps competition out."

Furthermore, when HSBC skirted AML regulation they got a $1.9 billion fine, but that works out to be 5 weeks worth of profit.

What about bitcoin? 
The report does attack bitcoin as well noting that:
"The first wave of cryptoassets, of which Bitcoin is the best known, have so far failed to provide a reliable and attractive means of payment or store of value. They have suffered from highly volatile prices, limits to scalability, complicated user interfaces and issues in governance and regulation, among other challenges. Thus, cryptoassets have served more as a highly speculative asset class for certain investors and those engaged in illicit activities rather than as a means to make payments."

Although they are a key proponent of the status quo, there is some truth to this claim. The average small-business owner cannot deal with such volatility when it comes to a medium of exchange.

Even proponents of Bitcoin, such as Andreas Antonopoulos, readily admit that the currency is in a bubble. But he also points out that it is a mechanism for people to control the currency instead of corporations or governments. (As noted in this post, he dismisses Facebook's foray into cryptocurrency)



Antonopoulos hits on a greater truth: whether Big Tech wins or the Big Bank continue their reign, the consumer ultimately loses. Alphabet Inc. (aka Google), who dropped its motto "do no evil", has been accused of destroying its competitors through their monopoly power. For example, Foundem (a price comparison site) accused Google of demoting its result because it is a competitor. That being said, there will be some gains that will accrue to the consumers until one emerges dominant.

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else

Algorithms stayed the chaos during Brexit storm: Can they help with auditor judgment?

The recent Brexit crisis hit the markets hard with the various stock indices plummeting and investors fleeing for the safe haven of gold, which went up "by $59.30, or 4.7 percent".

Amid this  chaos, some investment strategies fared well - thanks to the use of robots.

According to the WSJ article, "Who Made Money in the Brexit Chaos? Machines, Not Humans",  machines were immune to the fear, uncertainty and doubt that plagued markets (italics, highlight mine):

"This fund category, sometimes called commodity trading advisors, or CTAs, uses customized trading algorithms to spot market trends and place bets on futures and other derivatives. Most of the models didn’t factor in British election polls, bookmakers’ odds or the political-tea leaf reading that swayed other investors looking for an edge. In the weeks leading up to the Brexit vote, the trading models at many of these firms adopted a defensive pose. They favored high-quality government bonds, gold and safer currencies like the yen, while mostly avoiding riskier bets like oil and emerging markets.

That positioning paid off after Brexit caused the pound and more volatile assets to plunge as Thursday’s results came in. Société Générale’s CTA Index gained 1.5% on Friday. AQR Capital Management LLC, Fort and Welton Investments Partners LLC were among the big gainers... A key to CTAs’ success, their managers say, is that their models can tune out noise around market moving events—like an election or crucial economic data—that are important to investors but can be difficult to accurately forecast."

The article also quoted Lara Magnusen, portfolio strategist for Altegris’s main fund, who said (bold mine):

"Our models aren’t going to be affected by the same sentiments a human would be"

I thought that this was interesting as it illustrates how the machines can be seen as a way to provide an anchor when people are getting caught up in an emotional frenzy. Think of the implications for the world of audit and assurance, where professional judgement are made to determine what accounts, transactions, etc. are risky and should be tested. Imagine an audit algorithm that can be as an independent monitor that vets judgments of the audit professional - in a "race with a machine" scenario (for more on this idea see the Ted Talk below with MIT professor Eric Brynjolfsson). This could potentially improve auditor judgment, stakeholder confidence and audit quality.

Initially, I think this would be a way for audit firms to reduce the level of uncertainty associated with reviews from the PCAOB, CPAB and their equivalents in other jurisdictions. This would especially be the case if such audit oversight bodies would "bless" such algorithms and be able to ensure that the firms applied such judgment consistently, e.g. by having access to the "audit logs" produce by such programs.

The next - and more controversial step - would be to argue that independence rules can be relaxed in light of such automated oversight. To be honest I think there's a low likelihood of such an idea making traction with regulators in the near future, given that Europe has sought to require mandatory rotations of auditing firms. But it is something that should at least be contemplated, especially when automation becomes commonplace and attitudes may change towards how algorithms can play nicely with humans.

Amazon & Drones: Role of "Regulation" in technology disruption

A number of news outlets reported Amazon's testing of drones up here in Canada. According to the Globe & Mail:

"U.S. companies like the online shopping juggernaut Amazon are increasingly choosing Canadian airspace to test new drones after being hamstrung by restrictive laws in their own country that could take up to two years to change, experts say"

Amazon showcased its vision for using drones to deliver light packages in late 2013 (see video below). However, they have been vocal about their frustration with the US regulator to test their innovation. 

The US regulators seems to have buckled under the pressure that the e-commerce giant put on them. According to Gizmodo:

"The Federal Aviation Administration has just given Amazon clearance to begin flight-testing the drones in the United States. Again. For real this time...This is the second time in as many months that the online retail giant has received a drone testing certificate from the FAA. Last time around, however, the certificate only applied to an already-obsolete prototype. Frustrated by the Feds’ inertia, Amazon recently began testing its delivery drones at a “top secret” location in Canada, just 2,000 feet from the US border."

We could explore this from a point of view of how we actually live in corporatocracy - where corporations with millions in the bank drive governmental policy instead of the average citizen. But let's not do that. Instead let's focus on how "regulation" itself can impact technological innovation.

I don't mean regulation just in the narrow sense of the "big bad government" passing this law or that statute. But a much broader concept of how societal conventions and how economic powerhouses in the Capitalist society actually determine the course of technological development.

Take for example the rise of the iPhone in the corporate environment. What allowed consumerization to take place (i.e. allowing users to connect their favourite smartphone devices to the network instead of the corporate devices) was that Microsoft took an open approach to licensing it Exchange Active Sync. They could have created a walled garden that allowed Windows Phone only to connect to their email server, however, they paved the way for iPhone and  Android to connect their devices to the corporate email server. Microsoft as the "regulator" of which mobile device can connect to its mail server - if you will - essentially enabled the iPhone and Android to displace our beloved BlackBerries from the corporate environment (for more on this see this post). Had Microsoft saw more profit in walling off the market for its own devices the ability for Apple iDevice to disrupt corporate IT would have been stifled if not suffocated.

Think this is an isolated incident? Unfortunately, that's what the hype wants you to believe

For example, David Sarnoff of RCA squashed FM radio in order to protect his AM Radio technology and pave the way for television. The inventor, Edwin Armstrong, who initially was Sarnoff's friend, had foolishly shared his technological innovations with him only to be betrayed by him. FM Radio technology had the potential to share data, such as faxes - back in the 1930s. Can you imagine the state of the wireless technology had this technology been allowed to flourish? Well that's the point. Sarnoff - as a regulator of radio technology - saw fit to erase it out of existence.

AT&T is another case in point. It ironically attempted to slay the then maverick David Sarnoff's  nascent radio technology. However, Sarnoff was able to work with the FCC and others to defend his fledgling start up, RCA, and beat the odds (unlike his "friend" Armstrong who ended up taking his life unable to achieve the same victory against Sarnoff). In 1934 AT&T blocked the answering machine for fear that it would undermine their business because "ability to record voice would cause business people to shun the telephone for fear of having their conversations recorded". So although much good came out of AT&T's Bell labs, the point is that it was effectively the one acting as which innovation saw the light of day and which did not.

What this illustrates is that the mythical innovator whose technological rises to the top through some kind meritocratic process is just that - a myth. Rather innovation is much more about how society appoints through or market mechanisms those that will ultimately sanction technology or kill it. We have the Internet because the inventors were part of a governmental DARPA project. If Bell labs had invented the TCP/IP protocol would they have taken the same route or would have it gone the way 1934 AT&T answering machine? To answer that would be pure speculation, but it is entire possible I wouldn't be writing this blog post if some "regulator" had decided otherwise.  

SEC and the Quants: Will RoboCop get a BigData overhaul?

As reported in this Forbes article in 2013, the SEC began to use so-called RoboCop to assist with their regulatory duties.

Who is RoboCop?


No, it's not that infamous crime-fighting cyborg from the late-80s (coincidentally remade in 2014). It is actually the Accounting Quality Model (AQM) - not quite as exciting I know. According to Forbes:

"AQM is an analytical tool which trawls corporate filings to flag high-risk activity for closer inspection by SEC enforcement teams. Use of the AQM, in conjunction with statements by recently-confirmed SEC Chairman Mary Jo White and the introduction of new initiatives announced July 2, 2013, indicates a renewed commitment by the SEC to seek out violations of financial reporting regulations. This pledge of substantial resources means it is more important than ever for corporate filers to understand SEC enforcement strategies, especially the AQM, in order to decrease the likelihood that their firm will be the subject of an expensive SEC audit."

Another interesting point raised by the Forbes article is the use of XBRL in this accounting model: "AQM relies on the newly-mandated XBRL data which is prone to mistakes by the inexperienced. Sloppy entries could land your company’s filing at the top of the list for close examination."

(On a side note: AICPA has published this study to assist XBRL filers ensure that they are preparing quality statements, given that there are many possible errors; as noted in this study).

Within this context, we should take note of how the SEC is hiring "quantitative analysts" (or "quants" for short). As noted in this WSJ article:

"And Wall Street firms, for their part, are able to offer quantitative analysts—or “quants”—far higher pay packages than the regulator. The SEC’s access to market data also remains limited. In 2012, it approved a massive new computer system to track markets, known as the Consolidated Audit Trail, but the system isn’t likely to come online for several years, experts say."

Could the SEC pull a fast one and become the source of innovation? Although the WSJ article seems to downplay the possibility that the SEC can outpace the firms, it is not something that the audit industry can ignore.

As noted in a previous post on Big Data, it was just this type of mindset that Mike Flowers of New York City looked to revolutionize how the NYC leveraged big data to improve its "audit" of illegal conversions. Perhaps the SEC may follow in his stead.