NFTs: Heading for the Trough of Disillusionment?

The recent sale of NFTs from Yuga Labs showed both the promise and the peril of the hyped technology. On the one hand, Yuga Labs made “$320 million in what was considered the “largest NFT mint in history”, with its “sale of Otherdeed nonfungible tokens that represent digital land deeds on their new venture, the Otherside metaverse”.

 

Minting is the NFT equivalent of an “initial public offering” (IPO). But instead of selling stock, they are selling a digital token. In this case it was land rights in “a metaverse game world”. Each parcel of “digital land” was sold for “305 ApeCoin (APE), or nearly $5,800”. The incentive for the buyer is to get in early and then sell the NFT on secondary markets. For example, on OpenSea (a major reseller of NFTs) the Otherdeeds were selling for an average of just over 9 ether (ETH) or nearly $27,000.  

 

The peril?

 

The rush to cash in on this craze resulted in overloading the Ethereum blockchain. And that didn’t just result in slow service. It cost millions: $123 million. Users got hit with transaction costs that exceeded the cost of the “digital land deed”, coming in between “2.6 ETH ($6,500) to 5 ETH ($14,000)”.

 

In contrast, Visa charges merchants between “2.87 percent and 4.35 percent per transaction”, which would have been about $160-$260 per sale. It’s hard to see how the decentralized finance (DeFi) approach is superior to the “classic” approach of centralized finance (CeFi).

 

So, should we discard NFTs?

 

NFTs: What took them to the Peak of Inflated Expectations?

Before running for the hills and closing the books on NFTs, we should remember the Dotcom era. It was the late 1990s, Google was still a scrappy start-up and Microsoft was seen as the bully those days. And people will all starry eyed about the “new Internet economy’. Slap a “.com” behind your company’s name and voila! Millions of dollars of investment would be thrown at you.

 

So, is history repeating itself? In a sense, yes.

 

According to Gartner’s Hype Cycle, there is an initial hype phase when the innovation causes mania in the markets, which is known as the “Peak of Inflated Expectations”. That is, the innovation is seen as that silver bullet that will cure all.

 

Conceptually, NFTs provide a means to create “digital scarcity”, hence the term “non-fungible”. Specifically:

“NFTs allow ownership and use rights to be demonstrated for any piece of digital content by assigning the content a specific, nonduplicable identifier that is recorded on a distributed database, or blockchain, typically Flow or Ethereum.” (link)

 

This then allows physical collectible items – basketball cards, comic books, art, and so on – to be unique digital items. Previously, this was not possible as all digital “assets” were fungible, i.e. copies of copies with no way to distinguish one from another.

 

A secondary area of value within NFTs is the use of algorithms to generate art.  Specifically, algorithms are used to synthesize “different design features, accessories, and special traits… [to create] thousands of unique combinations.” In other words, an artist does not have to generate each work of art. Instead, they can “draw” one piece and then let the algorithm generate thousands of images based on that initial design. For example, the “Ape images” generated as part of the Bored Ape Yacht Club “collection” relied on this “procedural algorithms that can create tiers of rarity and value”.

 

Beyond art, sports media looks to be a potentially lucrative NFT market. Deloitte Global predicts between 4 to 5 million gifts/purchases for such digital work that “will generate more than US$2 billion in transactions in 2022”.   

 

Entering the Trough of Disillusionment: 10 Challenges with NFTs

The value of NFTs is intuitive at first glance. But there are challenges. The emergence of these problems, issues, and outright scams is a sign that we are heading into the next phase of Gartner’s Hype Cycle which is “the Trough of Disillusionment”. If this was the early days of the Internet, it would be the moment when investors realized that pets.com was not such a good idea after all. It’s in this phase that the problems with the innovation become apparent. Let’s look at 10 issues that have arisen with NFTs.

 

Issue #1: Blockchain does not scale like the Cloud

The +$100 million gas bill that Ethereum effectively issued to “digital land deed” speculators was not a first. This problem was previously experienced with CryptoKitties. As noted in this paper, “CryptoKitties was the first widely recognized blockchain game. Players could own, breed, and trade kitties, which are the only prop in the game.” The paper explains how collectors experienced massive gas bills from Ethereum to get in on the hype:

“The cost of performing operations on a public blockchain system is highly volatile due to the unstable price of cryptocurrencies, resulting in it difficult to control the cost of the applications deployed on the blockchain. As CryptoKitties was deployed on Ethereum, the cost of playing the game (including the costs of buying, breeding, and renting kitties, as well as the fees paid to Ethereum miners) has risen significantly due to the rapid rise of Ether price in the third stage. Ether price increased from US $451 on December 10, 2017, to US $1,322 on January 10, 2018…resulting in a significant increase in the cost of playing the game, raising the bars for new players entering the game.” [Emphasis added]

 

We’ve been conditioned by the cloud to expect automatic scaling; such bottlenecks seem to harken back to a more primitive era of computing. However, that’s the price of trust. The proof-of-work consensus mechanism is designed precisely to slow things down to allow for the miners to verify the transactions and prevent hackers from committing non-authorized records to the blockchain.

 

Issue #2: NFTs do not necessarily convey digital ownership

According to Deloitte Global: “Ownership of an NFT may include ownership of the underlying digital asset, though most sports NFTs sold to date have no ownership or use rights in the underlying media.” [Emphasis added, italics from original]

 

But perhaps a bigger smoking gun is at Christie’s auction house – the same one that sold Beeple’s digital artwork for $69 million. As highlighted by the well-known nocoiner, David Gerard: “Christie’s auction of an NFT is a fabulous worked example. There’s a 33-page terms and conditions document, and if you wade through the circuitous verbiage, it finally admits that … you’re just buying the crypto-token itself…”

 

He goes on to cite the terms of sale, right from the Christie’s site, which clearly states:

“You acknowledge that ownership of an NFT carries no rights, express or implied, other than property rights for the lot (specifically, digital artwork tokenized by the NFT)…”

 

Issue #3: If all that’s transferred is a hash, then where’s my “digital asset”?

The “what” is not the only issue. The ”where” is also an issue. As noted on CoinDesk: “On the simplest level, an NFT is a record (a document with a hash) stored on Ethereum (usually) that points to where its associated content (the image) lives somewhere else on the internet (it's much too expensive to store images on Ethereum).” [Emphasis added]

 

Like scalability, we are accustomed to the idea that storage is cheap and plentiful. But such assumptions don’t hold for the blockchain. Therefore, this disconnect between the location of the ownership record and the digital item itself can be baffling. Moreover, this approach contradicts that generally accepted wisdom that ‘possession is nine-tenths of the law’.

 

Issue #4: Is digital art a great vehicle for money laundering?

As noted by the US Department of the Treasury: “…the emerging digital art market, such as the use of non-fungible tokens (NFTs), may present new risks, depending on the structure and market incentives.”

 

Though specifics were not provided, it’s not surprising the that the US government has their eye on the area. Given the reputation that Bitcoin has for us in less than legal transactions, it’s not surprising that NFTs potential for nefarious purposes.

 

 

Issue #5: NFT Price Volatility is an Understatement

One of the more famous NFTs was Jack Dorsey’s first tweet, which was sold for $2.9 million. According to the Guardian, Sina Estavi, a crypto entrepreneur, who bought the tweet wanted a cool $48 million for it. What was he offered? According to CBS, only $280.

 

Issue #6: You could be buying an NFT that has been copied without the author’s permission

OpenSea noted in a tweet that “Over 80% of the items created with this tool were plagiarized works, fake collections, and spam.” Perhaps, the worst incident of this was how fraudsters sold the work of a dead artist. Moreover, “NFTs themselves can be used to fraudulently attribute digital designs to multiple owners”.

 

Issue #7: The superstar NFT artists make all the money, the rest of us don’t

The hype would make us believe that we all can get rich from NFTs. A study published on Nature found that 75% of NFTs sold for a price less than $15:

“We observe that the average sale price of NFTs is lower than 15 dollars for 75% of the assets, and larger than 1594 dollars, for 1% of the assets. Considering individual categories, NFTs categorized as Art, Metaverse, and Utility reached higher prices compared to other categories, with the top 1% of assets having average sale price higher than 6290, 9485, and 12,756 dollars respectively.”

 

Issue #8: For all the promise of blockchain’s transparency, opaqueness abounds

As noted earlier, digital artist Beeple (Mike Winkelmann) sold his "Everydays - The First 5000 Days" for $69 million. But the buyer was a mystery. But nocoiner Amy Castor had a hunch. She thought it was MetaKovan (Vignesh Sundaresan). And this was confirmed on CNBC.

 

But so what? It turns out that MetaKovan and Beeple were already business partners.

 

Beeple owns 2% of the B20 tokens that is behind Metapurse “a crypto-based investment firm”. Metapurse is controlled by MetaKovan. That firm had previously purchased “Beeple’s “Everydays: 20 Collection” artworks for $2.2 million”. (See Castor’s post here). Though the "Everydays - The First 5000 Days” is owned by MetaKovan and not Metapurse, the previous relationship does dampen the hype behind the sale and calls to us to question the valuation.

 

But a more important question, is why wasn’t this visible on the Ethereum blockchain? According to Castor:“…it sounds like the funds may even have gone into Christie’s escrow wallet…Anyhow, if both parties had Coinbase accounts, the exchange could just change the database records off-chain to flip account balances. In this way, Coinbase acts like a second layer, and you wouldn’t see the ETH transaction.” [Emphasis added]

 

Issue 9: NFTs still rely on “classic” intermediaries for mega sales

NFTs that sell the best still rely on “old-world” forms of intermediaries. That is, NFTs are not a way for the “common person” to make it rich simply because of their artistic talent. Instead, the more successful NFTs rely on the following:

·        Celebrity endorsements: Paris Hilton, Jimmy Fallon, Eminem, and others used their celebrity status to give a boost to the NFT “Ape Art” from the Bored Ape Yacht Club.

·        Whitelisting: Bloomberg reported on Chainanalysis’s finding that “[t]he practice of whitelisting appears to be similar to the preferential treatment of some insiders and investors that has long been practiced in the cryptocurrency world, especially with so-called initial coin offerings before the sales were shut down by regulators”. Citing the Chainanalysis study, Bloomberg also noted that “[u]sers who make the whitelist and later sell their newly-minted NFT gain a profit 75.7% of the time, versus just 20.8% for users who do so without being whitelisted”

·        Official Auction Houses: Beeple did not sell his $69 million piece of digital art on some random site on the Internet. He sold it at Christie’s. Christie’s has been around since 1766. It doesn’t get more classic than that.

 

Issue 10: NFTs are rife with information security issues

Speaking as a CPA/CISA, one of the craziest aspects of NFTs is that the process requires you to grant the entity issuing NFT (or the minter) logical access to your wallet. And what happens if you grant access to the wrong individual, i.e. a hacker? All that crypto will be emptied out.

 

The other scam that is out there is that people can “airdrop” an NFT into your wallet. And if you click on that? As RAC explained to Rolling Stone, “[e]verything’s programable, so what they do is they make these tokens unsellable. It basically locks you into something and forces you to give them access to your funds, and then they steal your money.”

 

What RAC is referring to is the programmability that’s baked into the Ethereum blockchain. Consequently, clicking something (even deleting something) could initiate malware that would result in your digital wallet being drained of funds.

 

Closing thoughts:

 

So with all these problems, what does the future look like?

 

It’s really about governance. The unregulated nature of stocks in the 1920s ultimately led to the Great Depression, which brought the Security Exchange Commission into existence and the need for financial audits. Similarly, governance will ultimately need to be implemented to enable true ownership of not just the hash in the NFT but the underlying asset. That is, just like you own a painting, you should have the underlying code that is the actual digital art.

 

In terms of AML, Know Your Customer (KYC) controls are percolating at NFT marketplaces. Wired reported that:

 

“A Twinci spokesperson says the platform is implementing something like this at the moment – it is verifying artists to make them stand out from ordinary users. Green-ticked artists have verified their identity in a process similar to how Twitter doles out its blue ticks. People are asked to give their name, a photo of themselves, proof of them creating an artwork as well as a digital portfolio. Twinci cautions its community to re-consider collecting NFTs from non-verified artists.”

 

But doesn’t this contradict the decentralization that blockchain is supposed to bring?

 

The challenge with this idea is largely based on the myth of individualism. Society is not simply composed of individuals. Rather, it’s the institutions and collectively shared norms that hold society together. For example, if Canadians did not collectively respect private property then anything you held could be stolen without recourse. But perhaps the greatest illustration of such conventions goes back to how disputes were handled on the blockchain itself. Consider the DAO hack of 2016. The consensus amongst the Ethereum community felt and injustice was done because of the theft of ether (the cryptocurrency used on Ethereum). So they turned to Ethereum’s leader/inventor, Vitalik Buterin, to mutate the immutable. This is why the term “immutable” shouldn’t really be used; tamper-resistant is more accurate.

 

Consequently, once such myths give way to practical necessities of governance (e.g. SEC-type organizations managing minting, courts opining on digital ownership, ISO standards, etc.); we will be on our way from the current wild west to something safe and stable. Again, this is history repeating itself. The cloud took time for standards to take hold. For example, cloud service providers see the SOC2 audit report on the IT controls as a standard. But it wasn’t always. In the early days of cloud, it was rumored that Eli Lily had to walk away from Amazon because they could not offer the IT controls that they needed (which Amazon denied). Regardless, the security norms took a while to become the status quo. Similarly, this standardization is part of the process to take the NFTs from the Trough of Disillusionment to the Slope of Enlightenment. This is the next phase of Gartner’s Hype Cycle. Only time will tell how players within the industry will coalesce around such standards given that the NFT/blockchain evangelists are still stuck with the idea that society is unnecessary.

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

 

AI and the CPA: What should CPAs know about GPT3?

In the epic battle between man versus machine, the chess champion Gary Kasparov threw the match because it is alleged that he thought that the AI-powered system did a well-calculated move. In reality, it was just a random move that the system threw out because it had experienced a technical glitch.

One up-and-coming AI-enabled service to watch is GPT-3 from an organization called OpenAI. OpenAI was started by Elon Musk. It’s in beta right now and in a really raw state but the capabilities that have surfaced are pretty amazing. 

One capability (as noted in the video) it has is summarizing long reads. However, there are serious flaws that need to be worked out. For example, it advised a fake patient suffering from depression to kill themselves. So it's not going to be rolled out at a hospital any time soon, but it is something definitely watch.

AI and CPAs: Competitors or Collaborators?

AI could make the profession more sustainable, as these mundane tasks could be handed to a system. MIT’s Eric Brynjolfsson describes this concept as "race with the machine". The idea is that doctors, accountants, lawyers, can work better together with technology. It’s almost like a second set of eyes or someone that can help you assess whether the professional judgement on an issue is correct.

However, this is not something that is currently on the horizon. 

What’s more realistic is understanding where the economics of automation will apply for more basic things like have a more timely close. McKinsey put out a study in August 2020 that found automating and increasing the accuracy of forecasts helped management make better decisions. One case study they highlighted was a manufacturer that was able to reduce inventories and product obsolescence by 20 to 40 percent. 

Change is coming faster than we expect

We should be aware of the concept of exponential change.  Technology, like AI, improves at an exponential rate and not a linear rate. Consequently, monitoring the space is key for CPAs and other to ensure that they see change coming and adapt accordingly. 

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

What the Tech? A look at GameStop, Algorithmic Trading and Beyond

By now everyone is aware of the epic battle involving Gamestop, hedge funds and WallStreetBets.

On the topic, I saw this video that speculated the role of algorithmic trading as one of the causes:

Based on that, I searched for any hint of algorithmic trading. The best I could find was the following:

"Some hedge funds likely hopped on for the ride, though. Many use what’s known as quantitative algorithmic trading, meaning the process is automated, allowing them to quickly catch any big waves.

"That's exactly what they do. They look at the momentum, and they look at the order size and the amount of activity and absolutely they ride that momentum,” Shelly said. “They're professionals, and they're experts at this business, and to think, long term, you're probably going to do better than they are is kind of a fool’s game.”

The question is how much of this amplification versus direction? Richard Coffin of the Plain Bagel, seemed to hint it is more of the latter rather than former. 

So let's step back and see what was actually going on. 

In any trade, there are always two sides to it. And so what are the two opposing forces in this saga?

This started with the hedge funds shorting 139% of Gamestop's stock:

"GameStop stock equal to 139% of its available shares has been borrowed and sold short, a bearish position showing mark-to-market losses of over $6 billion year-to-date, according to data from financial analytics firm S3 Partners. That figure is little changed since last Thursday’s 141% short-interest reading, even though GameStop shares have surged roughly 78% in the past two days alone."

The hedge-fund lost so much money that they had to get a $2.75 billion bailout from fellow hedge-funds:

"Hedge fund giants Steve Cohen and Ken Griffin are joining forces to bail out a fellow trader whose positions in runaway stocks like GameStop have been getting hammered. Griffin’s Citadel and Cohen’s Point72 Asset Management are investing a combined $2.75 billion into Melvin Capital Management, which has seen its recent bets on stock declines thwarted by a small army of investors with get-rich-quick dreams. The fund, run by ex-Cohen lieutenant Gabe Plotkin, is down 30 percent, the Wall Street Journal reported."

On the other side, were the now-infamous WallStreetBets (WSB) group on Reddit that started to push the stock up. This has been reported in the press from multiple sources. Here is a sample:

Bloomberg: "Give credit where it’s due. In their frenzy, WSB’s cocky hordes have managed to turn the tables in a game short sellers invented, spinning gold from the complacency of others. Before this year, GameStop was a cash register for bearish traders, who borrowed and sold more shares than the company issued. Hedge funds had been winning so long that they overlooked the tinderbox they were creating should sentiment turn."

WSJ: "Online forums like Reddit’s WallStreetBets are full of traders boasting that they are beating up the big investors who normally control the market. It is an ironic twist, or a sign of their lack of understanding, that they equate short sellers with the Wall Street establishment."

CNBC: "In the Reddit forum “wallstreetbets” with more than 2 million subscribers, rookie investors encouraged each other to pile into GameStop’s shares and call options, creating massive short squeezes in the stock."

Also, see Mad Money's Jim Cramer thoughts on this. The video also includes comments from Herb Greenberg, CEO of Pacific Square Research, who goes as far as to say this may be illegal. And this is quite rare to have such a crowd to get regulators involved. The point being is that this type of talk probably indicates the large institutional investors have been caught by surprise by WSB investors.

But is this solely about "momentum" or is there something more from the fundamentals side?

Chamath Palihapitiya pointed on CNBC, there are some disagreement on the "fundamentals" of Gamestop

What are those fundamentals? 

One is that (according to one analyst) that the sales of the Sony Playstation 5 would give GameStop a boost. The other, according to Bloomberg, was that there was new leadership on GameStop's Board:

 

"But some people think GameStop is primed for a turnaround. One of those people is Ryan Cohen, the former chief executive officer of Chewy Inc., the online pet-food retailer. If you can sell pet food online, you can sell video games online. GameStop does sell some video games online, and could probably do more of that and less with the stores in malls. Cohen’s investment vehicle owns about 12.9% of GameStop, which he started buying in August, when the stock was in the mid-single digits. In November he sent a stern letter to GameStop’s board of directors, reminding them of what a bad job they’ve done, asserting “that GameStop has the flexibility to evolve into a technology-driven sector leader,” and urging the board to try to do that. Two weeks ago, on Jan. 11, GameStop announced that Cohen and two of his friends from Chewy would be joining GameStop’s board. “Their substantial e-commerce and technology expertise will help us accelerate our transformation plans and fully capture the significant growth opportunities ahead for GameStop,” said GameStop."

And so that battle lines were drawn. 

According to Bloomberg, there were two things pushed the value of the stock upwards. 

First, since the hedge fund had shorted more than a 100% of the shares that exist, they really needed to buy back those shares. But once the shares started drifting upwards, the more they bought, the higher they got. This is what is known as a "short squeeze". 

The second was that the WSB investors used call options: "If you are a retail trader looking to gamble on a stock, you can buy call options to get leveraged exposure to the stock. For instance, last Tuesday (Jan. 19), you could have bought a $50-strike call option on 100 shares of GameStop stock expiring this coming Friday (Jan. 29). Bloomberg tells me this option would have cost you about $3.35 per share, or about $335 for a 100-share option contract; the stock closed that day at $39.36. If you sold the options on Friday (Jan. 22), when the stock closed at $65.01, they were worth $18.16 per share."

But it seems here is the key part that essentially enabled the WSB investors to use the options as asymmetrical warfare against the hedge funds. They bought so many call options that the "market makers" that sold them the shares had to buy the shares because of something called a "gamma squeeze", which Bloomberg explained as follows: 

"Meanwhile the market maker who sold you the options would have hedged its option exposure by buying about 40 shares of GameStop stock, for about $1,575. (This—the fraction of the underlying shares that the market maker buys to hedge the option—is called “delta.”) Your $335 of option premium caused $1,575 of stock buying." [Emphasis added]

In other words, the risk of the stock going up means that the market maker has to buy actual stock to hedge their risk. And so this caused the GameStop stock to go up. 

Also, tweets from Elon Musk and Chamath Palihapitiya (both billionaires) further assisted the rally of Gamestop stock.  

And this takes us back to the trading algorithms. They are programmed and designed to take advantage of such "momentum" and so that is a basic strategy of these bots. 

Although one can assume they played a role, it does seem that the WSB investors were able to find a chink in Wall Street's armour and drive a bus through it. 

This is not investment advice. 
So do not take it that way. 

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

Stablecoins are now approved! But will they be used against China, Russia and beyond?

Wall Street Journal reported that the OCC has approved the use of stablecoins within the financial industry. Specifically:

"Banks are allowed to participate in public decentralized networks and use stablecoins in payment settlements, according to new guidance from a federal banking regulator.

The Office of the Comptroller of the Currency in a guidance letter this week said national banks and federal savings associations may use new technologies, including independent node verification networks—also known as blockchain networks—and related stablecoins, to perform bank-permissible functions."

The article also defined stablecoins as "a type of digital currency that aims to maintain a stable value and is backed by an underlying asset or a benchmark, such as the value of a fiat currency, or a basket of assets that could include investment securities and commodities. The OCC in its guidance said stablecoins can be used as a mechanism to facilitate payment activities, such as the payment of remittances."

Although things are expected to improve between China and the US with the incoming Biden Administration, the reality is that there is still a competitive rivalry between the two nations. 

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." [Emphasis Added]

Foreign policy is but one consideration in driving the need for stablecoins. However, it is not one that is brought up often in these discussion and should be kept in mind.

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

Data Tsunami: How big is the Data Deluge? (Part 1)

Was invited last year to speak about the Data Tsunami at the AICPA Engage conference, but I didn't quite make it there! Instead, I presented virtually. 

So, will be breaking out some of the topics that I will be discussing over a few blog posts. 

How big is the data tsunami?

Probably, the first thing that comes to mind is social data. The Internet truly unleashed the first torrent of the data tsunami. Google's search index alone is 100,000,000 GB. In terms, of social data we are looking at the following:

• Twitter: 200 billion tweets per year (Twitter)
• Facebook: 4 petabytes of data per day (WEF)
• WhatsApp: 65 Billion Messages per day (WEF)
• YouTube: 250 million hours per day (Variety)
• Apple: 50 billion podcasts downloads (Fast Company

It's interesting how the data tsunami encompasses print, sight and sound. This is of course lends itself to analytics, but we will discuss that in a future post.

In terms of organizational data, Walmart generate 2.5 petabytes of data per hour. According to American Banker, 12 million petabytes (per year) of data flows through the financial industry. In terms of manufacturing, 6,000 fan blades manufactured by Rolls Royce generates 3 petabytes. It gives an idea of how much data is generated by the millions of parts that go into airplanes, trains and automobiles.

In terms of medical data, Stanford published the following: 

“The sheer volume of health care data is growing at an astronomical rate: 153 Exabyte…were produced in 2013 and an estimated 2,314 Exabyte will be produced in 2020, translating to an overall rate of increase at least 48 percent annually.”

This obviously has tremendous privacy concerns. 

How big will the data tsunami get? 

According to IDC, "the collective sum of the world’s data will grow from 33 zettabytes this year  [2018] to a 175ZB by 2025". 

A couple of key contributors to this 'tsunami of data', will likely be the Internet of Things (IoT). 

IDC predicts that 40+ billion IoT devices will generate 79.4 ZB of data by 2025. The other generation of 'digital exhaust' will likely be autonomous vehicles, which according to Intel produce about 4 terabytes of data per hour. 

But the big question is so what?  

We'll take a look at this question in the next post. 

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.

 

CPAs to the Future: Why Data Governance?

In 2018, CPA Canada held the Foresight Sessions where they consulted CPAs and others how the profession should move forward. CPA Canada took a broad view of the topic and brought a diverse crowd of people to look at how things could unfold. There were a number of facilitated sessions that looked at a number of possible scenarios and how the profession could thrive in each of those scenarios. What I liked about the sessions was the diversity of thought. The environment was so open that attendees were even willing to talk about things like wealth inequality and its potential impact on the profession. 

So where did things end up? 

A report was published and the two key areas that became the focus where Value Creation and Data Governance. 

Before looking at where we are now, it is good to take a step back and look at the underlying need to re-examine the profession. The CPA profession was borne in a book-based world where knowledge went through a manufacturing process of sorts. Regardless of whether it is the accounting standards themselves or the actual financial statements, the idea was there was a sense of finality to the process. The Internet, and more specifically the hyperlink, changed that. Data, information and knowledge are now networked. 

It's not to say that the profession was unaware of this. 

As a CPA who got his start in the world of Audit Data Analytics back in 2000 (yes, 20 years ago, when this type of work was known as computer-assisted audit techniques). Back then, IT-focused CPAs like myself used to tools like Audit Command Language or IDEA  (sometimes referred to as 'generalized audit software'). This required the analysis of data largely for audit support. 

CPA Canada also published the Information Integrity Control Guidelines (authored by Efrim Boritz and myself), which looked at how controls and "enablers" would create information integrity. The project was designed to take a fresh look at the traditional dichotomy between "general computer controls" and application controls". For example, the publication also looked at controls specifically around content. 

Why Data Governance? 

The challenge I have found is how to succinctly articulate how CPAs can play on the dividing between business and technology.  Data governance probably is a good place to start. Even when you consider something more technical like a 'data scientist', a key component is to have business domain knowledge. Hence, to capture the future it makes sense to look at something that is beyond technology but rather data and information. After accountants have experience with data, but not configuring routers. Furthermore, as pointed out in this CPA Canada article "there is already a need for foundational standards of practice around all aspects of data governance and the data value chain".

Why are CPAs suited for data governance? 

I have always felt that CPAs have a solid foundation in understanding information. Through the FASB framework, we realize the trade-offs between relevance and reliability, as well as understanding the reality of what is needed to audit something. When looking at the work Efrim and I have done around information integrity, this was a key resource because it is unique in understanding the parameters of information. 

When teaching a class at Waterloo, I linked how this framework is now even relevant to social media companies. Google/YouTube, Facebook, and Twitter have all been "auditing" posts on their respective sites due to misinformation about COVID-19 or other matters. When covering this in-class, the concern I raised was around the "slippery slope". For example, does that mean all the other posts are "materially correct"? Such things illustrate how CPAs can add value when it comes to data governance.

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.

 

'The Algorithm Made Me Do It': How Racist-Tech led an African-American man sleeping in a filthy cell

We've heard of Fintech, maybe even Regtech, but have we heard of Racist-Tech?

In the past few weeks, the US sees the largest protests in its history. I am not referring to the protests where armed protestors show up to state-capitals without much reaction. Rather, these are the protests that were in response to the death of George Floyd. George Floyd who died after a police officer kneeled on his neck (with his hands in his pocket) for eight minutes and forty-six seconds. These protests, in contrast, have been met with a strong reaction.

A related incident occurred a few months before Mr. Floyd lost his life.

As reported in NPR, Robert Julian-Borchak Williams was picked up by police by January 2020 and when he got to the station, he was surprised to the lack of resemblance between him and the pictures of the suspect.

The officer's response? "So I guess the computer got it wrong, too." 

Regardless, "Williams was detained for 30 hours and then released on bail until a court hearing on the case, his lawyers say."

(For more on the story, check out this video)

The story is chilling, to say the least.  The knee jerk reaction is to think of Skynet and dark AI. But is that really what's happening here?

The social unrest speaks to how the desegregation struggles of the 1960s have not totally succeeded. The challenge is that racism is systemic. Within the institutions that hold society together, the gothic systems that existed in the 1950s somehow still exist until today. Sure, it's illegal for prosecutors, judges and cops to be racist. But then how do we explain the treatment of George Floyd and Robert Williams? Is there is no overall monitoring provisioning to ensure that the desired equality is achieved? For example, good monitoring controls over a system would assess the outcomes to see if the desired outcomes are achieved. There was a case that tested this idea. In McClesky v Kemp, where the defence team provided Dr. Baldus's study that statistically proved that the African American is 4.3 times more likely to get the death penalty, the "big data" analysis was rejected and Warren McClesky was put to death by the state. (And yes it controlled for 35 non-race variables).

In other words, data analysis shows there actually is a problem. However, the courts essentially denied this reality and pretended everything is okay.

What does this have to do with Racist Tech?

It means that the systems and the data are biased. Racist Tech will naturally grow out of such systems. AI and predictive policing models that use data from the court system - also pretending everything is okay - will inevitably lead to people like Mr. Williams getting caught up in the criminal justice system. Compared to George Floyd he only had to spend 30 hours in a filthy cell. But during that time he would have no idea whether it was going to be 30 hours or 30 months, given how long it takes to exonerate the innocent.

I was once asked at a conference whether we can look forward to a future where AI takes over. My response was to point out the real issues is with the human that run the technology.  If I had to answer that question today, I would simply ask them to call Mr. William who knows that the nightmare scenario is here already.

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.