Ten years ago, an anonymous cryptographer
laid out the principles of an online currency that would operate beyond
the reach of governments and central banks. — dpa
BITCOIN was supposed to solve the problems of analogue currencies. Instead, it created a new one: an enormous amount of global energy consumption that rivals the power usage of an entire country like Ireland.
According to findings of a new study, the implementation of this cryptocurrency could lead to enough emissions being produced so that global temperatures rise 2°C by 2033.
The study, which was published in the journal Nature Climate Change, found that the hardware and electricity needs of Bitcoin alone could significantly impact climate change for the worse.
“Currently, the emissions from transportation, housing and food are considered the main contributors to ongoing climate change. This research illustrates that Bitcoin should be added to this list,” said Katie Taladay, one of the paper’s co-authors from the University of Hawaii at Manoa.
The technical design of how transactions are processed causes Bitcoin and many of the growing numbers of rival cryptocurrencies to consume an enormous amount of energy in so-called Bitcoin mining centres around the world.
And yet the digital currency Bitcoin is still enjoying hype as one of the greatest financial phenomenons of our time.
The foundation for Bitcoin was laid out 10 years ago when an anonymous cryptographer using the name “Satoshi Nakamoto” published a paper laying out the principles for autonomous digital money.
The ideas it contained were revolutionary: No control by central banks, no national borders.
Instead, a mechanism called blockchain would provide trust and security in the system. In broad strokes, blockchain is a publicly viewable ledger of transactions, each saved one after the other.
But as the cryptocurrency’s wild fluctuations and electricity needs have attracted a lot of media attention, the ramifications of the latter have only recently been brought to light.
In a different article published in May by financial economist and blockchain specialist Alex de Vries, the electricity consumption of Bitcoin was estimated to be around the same as the electricity use of the Republic of Ireland.
De Vries also predicted that Bitcoin could be using as much as half of a percent of the world’s total electricity consumption by the end of this year.
“To me, half a percent is already quite shocking. It’s an extreme difference compared to the regular financial system, and this increasing electricity demand is definitely not going to help us reach our climate goals,” de Vries said.
“With the ever-growing devastation created by hazardous climate conditions, humanity is coming to terms with the fact that climate change is as real and personal as it can be,” said Camilo Mora, associate professor of geography in the College of Social Sciences at UH Manoa, Hawaii.
“Clearly, any further development of cryptocurrencies should critically aim to reduce electricity demand,” Mora, the lead author of the new study warns.
So as Bitcoin celebrates 10 years since its creation and it gains more and more supporters each year, we should probably take a moment and give this energy-sucking technology a re-think. – dpa By AMY WALKER
The field of accounting is in need of a new breed of professionals who can contribute more than a quantifiable value to companies.
Increasingly, accountants
in business are given the opportunity to be less involved in automated
operations and focus more on bigpicture strategies, which gives a clear
indication of the type of skills required in the near future. Bryan
Chung, FCPA
WHEN talking about the Industrial Revolution, images that often come to mind include the extensive use of steam power, the birth of heavy machinery and ironworks, and bleak factories in England.
However, two more industrial revolutions have since passed and the 21st century is paving its way for the Fourth Industrial Revolution (IR 4.0), which is seeing the rise of autonomous decision making of cyber-physical systems and machine learning through cloud technology.
In simple words, IR 4.0 is the usage of artificial intelligence (AI) and the Internet to transform age-old processes and operating procedures across all industries.
With such change taking place, what does this mean for the accounting industry and where do accountants find their relevance in an era that looks to automate everything?
Calculating assets
In an interview with international education provider Kaplan, Malaysian Institute of Accountants’ (MIA) chief executive officer Dr Nurmazilah Datuk Mahzan said, “Among the current trends that are creating waves in the accountancy profession are big data and analytics.
“Companies of all sizes create massive structured, unstructured and semi-structured data every day. Organisations harnessing big data would be able to find new insights and discover unique patterns of their customer behaviour or even create new businesses that were previously not possible.”
Echoing her sentiments is Bryan Chung, Fellow of CPA Australia (FCPA), divisional councillor at CPA Australia (Malaysia), who believes that even though AI is good at matching patterns and automating processes – making technology useful to many functions in companies in the process – accountants still play a vital role.
He says, “While there is a lot of hype surrounding blockchain and AI in accountancy with more firms taking steps to increase or experiment with their use, it is unlikely that accountants (or auditors) will be out of a job anytime soon.
“It is likely that most of the administration process will be the first to be introduced to AI. Increasingly, accountants in business are given the opportunity to be less involved in automated operations and focus more on big-picture strategies, which gives a clear indication of the type of skills required in the near future.”
The challenge, however, is turning the current workforce in the accounting field into professionals who truly understand the implications of IR 4.0, not just in terms of their personal skills but also movements within the industry.
Discovering market potential
Gone are the days when sales numbers, website traffic and KPIs were sufficient information to measure monthly net profits.
In the same Kaplan interview, the organisation’s global professional accountancy head Tanya Worsley said, “Businesses today depend on their accountants beyond purely checking financial figures and balancing books.
“Financial professionals are expected to be able to provide their clients with actionable insights that can add value to the organisation’s overarching strategic goals.”
The changing role of accountants in the digital economy is what prompted MIA to launch the Digital Technology Blueprint in July this year, a document that outlines the five driving principles to help guide Malaysian accountants to respond appropriately to digital technology.
These principles are related to digital technology trends, the identification of capabilities, harnessing of digital technology, funding and governance.
Accountants who fail to stay updated with the latest trends and knowledge will cause their employers to lose out in the long run, while competing firms take advantage of the evolving cloud system.
For these reasons, upskilling and obtaining professional qualifications from MIA or accountancy bodies such as CPA Australia, Association of Chartered Certified Accountants, Institute of Chartered Accountants in England and Wales or Chartered Institute of Management Accountants should be considered a necessity instead of mere steps for higher management.
As most professional accountancy bodies require members to undergo regular training to maintain their memberships, these certified professionals are expected to be fully prepared for IR 4.0 and, by and large, artificial intelligence experts.
Chung adds, “IT knowledge is no longer an option. Lest we aim erroneously, it is not how extensive the IT knowledge is (as this is available in abundance and can be acquired easily), but the ability to understand the evolution of the profession and apply the knowledge appropriately.”
Explaining that accountants must use technology in their favour to elevate companies to new heights, he gives the example of successful tech businesses that used e-platforms to achieve massive scalability and visibility within a short time, despite having owners or founders who were not IT graduates.
“In the same way, accountants should be more strategic, make sense of the vast data available and deliver services based on the twin pillars of speed and quality,” he continues.
Eliminating liabilities
When combining this piece of information with the future route of total automation for jobs that are repetitive, rule-based and involve limited or well-defined physicality, the traditional job scope of accountants is coming to an end.
Employers are bemoaning the skill gaps currently present in the knowledge of digital technologies, forcing companies to spend resources retraining and reskilling their employees.
At the other end of the spectrum, constant news reports highlight the more pressing issue of employers having difficulty finding good graduates who can hit the ground running upon entering the workforce.
These situations highlight the dire need for a new breed of accountants who can provide more all-inclusive corporate reporting, which tells less about the numbers and more about the narrative of a company.
The Malaysian education system, for one, must move towards becoming an ecosystem for continuous upgrading of skills, working together with employers, be they officials from the Government, small business entrepreneurs or industry experts from professional organisations.
Colleges and universities need to continue reviewing their course offerings so that graduates have an accurate understanding of the evolving industry while being trained to adapt to new technologies and autonomous changes at the workplace.
However, it is not all doom and gloom. Chung points out, “There are now many initiatives being undertaken by various professional organisations and associations to provide education to accountants to increase awareness of the changes taking place.
“There are efforts now by professional bodies, corporates and academia to come together to address the disconnect between what’s being studied at universities and what’s relevant in the business world.”
Given how the financial technology space has demonstrated the willingness of companies to use innovative methods, Chung is optimistic about the future as the accounting profession can not only make positive inroads but ride on the back of this momentum to accelerate the learning and adoption of technologies as the nation moves into a new era of automation.
Talk on trade: (from left) Interbase Resouces Sdn Bhd MD and
Lelong.com.my co-founder Richard Tan, Chong and SME Association of
Malaysia national deputy president Ong Chee Tat during a panel
discussion on Global is the New Local: The Changing International Trade
Patterns of Small Businesses in Asia Pacific, organised by FedEx.
More SME seen to be embracing technology
WHILE its been a constant lament that local small and medium-sized enterprises (SMEs) are not embracing digital technology, a new survey seems to suggest otherwise.
A recent FedEx-commissioned study on trends being adopted by SMEs in Asia Pacific (Apac) has revealed a high adoption of new technologies among local SMEs.
According to the study, Malaysia ranks fourth (among nine Apac countries surveyed) in digital platform implementation and third in adopting Industry 4.0 technologies.
Entitled “Global is the New Local: The Changing International Trade Patterns of Small Businesses in Asia Pacific”, the research revealed that an average of 88% of Malaysian SMEs are adopting digital economy platforms, such as e-commerce, mobile-commerce and social-commerce platforms.
FedEx Malaysia managing director S.C. Chong says it is critical for SMEs to take advantage of technological advancements as a catalyst to enter into new markets, improve customer service support and experience, and provide a more efficient end-to-end customer journey.
“SMEs are the engine of growth and form the backbone of Malaysia’s economy,” he says during a briefing on the survey, last week.
Chong adds that it is encouraging to see SMEs taking the initiative to grow their business through the adoption of new technologies, infrastructure-building, and expansion into international markets.
Citing the survey, he says that 61% of local SMEs are optimistic that the e-commerce platforms will help contribute to increased revenue growth in the next 12 months.
“The study also found that 69% of Malaysian SMEs have incorporated Industry 4.0 technologies into their operations such as mobile payments, automation software and big data / analytics in particular.”
Industrial Revolution 4.0 refers to the paradigm that machines are now able to autonomously adapt and coordinate their tasks to meet human needs.
The survey also shows a significantly high adoption rate of mobile payments among Malaysian SMEs at 90% (higher than the Apac SME average of 73%), with automation software and big data / analytics among the top Industry 4.0 technologies being used by SMEs at 84% and 77% respectively.
In addition, the survey also showed that 78% of respondents agreed that Industry 4.0 technologies have enhanced efficiencies in the supply chain and distribution channels, while helping reduce challenges brought by cross-border payments.
The results of the survey were based on interviews with 4,543 senior executives of SMEs in nine markets in Apac between March and April 2018. The markets included in the research were China, Hong Kong, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Vietnam.
The interviews were split equally by market with a representative mix of company sizes: micro (one to nine full-time employees), small (10 to 49 full-time employees) and medium (50 to 249 full-time employees).
Each market had an average of 500 respondents.
SME Association of Malaysia national deputy president Ong Chee Tat says SMEs and Industry 4.0 are key components towards the growth of the nation, as Malaysia works towards achieving a high-income economy.
“While technology may have reduced the gap between SMEs and larger industry players, SMEs still face various challenges in the adoption of the latest trends or tools in technology. Most SMEs may find that they lack sufficient finances, knowledge or workforce talent to adopt these new technologies.
“As such, we (the SME Association) are cognisant of the barriers to technology-adoption and continue to guide, empower and support SMEs by providing strategic advice or counsel and initiating networking platforms to facilitate knowledge exchange.”
Ong says that the SME Association is currently looking to set up an SME Academy to help provide training for local start-ups.
“We hope to be able to launch this academy by this year,” he says.
The survey also revealed that 95% of Apac SMEs have made use of digital platforms such as e-commerce (82%), mobile-commerce (72%) or social-commerce (74%) in their business operations.
“In Malaysia, the top social media platforms are Facebook, WhatsApp and Instagram,” says Ong.
According to the survey, the top social media platform used in Apac markets is Facebook, with the exception of China (WeChat) and Taiwan (Line).
In comparison, Malaysia has an overall higher adoption rate of e-commerce (90%), mobile-commerce (87%) and social-commerce (86%) compared to other markets in Apac.
Also, the survey says 61% of Malaysian SMEs expressed confidence that the digital economy will help reduce barriers to finding global customers beyond Apac.
Chong says the finding is strongly supported by Malaysia having 146% mobile penetration, 22 million internet users, 18 million active social media users, and seven million online shoppers, leading to Malaysia ranking 31st among the most tech-ready countries around the world.
Meanwhile, Interbase Resouces Sdn Bhd managing director and Lelong.com.my co-founder Richard Tan says that by educating SMEs and raising their awareness on the digital economy, there will be a rise in brick-and-mortar SMEs having an online presence to augment and complement their business.
“At Lelong.my, our integrated online platform which comes with services such as e-payment solutions and digital storefronts, has allowed us to extend our reach to capture the younger generation of increasingly digital savvy customers and merchants.
“As an online retail platform, we continuously evolve and transform ourselves to ensure that we fully understand the consumer journey and experiences to make it a seamless, pleasant one.”
He also says that the rise in digital platforms will not result in brick-and-mortar outlets becoming obsolete.
“I believe they will complement each other,” he says, adding that this is why it’s important for companies to have both a physical and online presence.
“I might see a product at a store somewhere, but may decide to purchase the item off of the company’s website. On the flipside, I might see something online that I might like, but would want to physically see it first, before deciding to buy.”
Tan emphasises that it is in a situation like this that SMEs need to have a presence online.
“You need to have your content displayed on the Internet. If people can’t find your product on the web, they may just decide not to buy it at all. That’s the behaviour of the new group of consumers today.
“You have to digitize your content.”
Chong admits that having products and services accessible via the web nowadays is a given.
“However, there are still products and services that you can’t get online. But it’s important to be able to have your product on the web, so that people can learn about it and either buy it or choose to view it physically at your store.”
Growth opportunities
In conjunction with the recent “Take E-Commerce to the Next Level” conference by DHL Express Malaysia, the logistics firm said in a statement last week that there is great potential for Malaysian SMEs to grow their business overseas through e-commerce.
“By 2020, it is expected that one out of five e-commerce dollars will be generated through cross-border trade. Business to consumer (B2C) e-commerce has grown at a faster pace than most other industry sectors in recent years, with premium cross-border shipments growing from 10% to more than 20% of the volumes of DHL Express.
“This is further boosted by various incentives the government has provided to ensure that the local e-commerce sector has the potential to lift Malaysia’s total trade to RM2 trillion this year.”
Over 100 local SMEs attended the conference.
Its speakers included those from Amazon Global Selling, Payoneer, Everpeaks, Malaysia Digital Economy Corp (MDEC) and Malaysia External Trade Development Corp (Matrade), who shared their insights on the importance of logistics, digital marketing, payment options and sales methodologies as part of the entire B2C ecosystem.
“These takeaways are meant to better equip local SMEs to meet the increasing demand of customers who seek faster fulfilment and more variety at cost-effective prices,” says DHL Express.
In the same statement, e-commerce conglomerate Amazon encouraged more Malaysian SMEs to expand their business by tapping Amazon’s global reach.
Amazon Singapore’s Amazon global selling head Gijae Seong says: “South-East Asia has quickly grown to be one of the most important regions for Amazon Global Selling.
“In the US alone, Amazon has over 150 million monthly unique visitors. We hope that more local SMEs will consider expanding their business globally on Amazon in the future.”
In addressing the challenges of SMEs to expand its presence on a global level, Matrade transformation and digital trade division director Noraslan Hadi Abdul Kadir points out that Matrade is Malaysia’s national trade promotion agency, and therefore has the mandate to promote local SMEs overseas.
“Our eTRADE Programme offers financial incentive valued at RM5,000 per company, which can be utilised to partially cover the on-boarding cost to be listed on world’s renowned e-Commerce platforms the likes of Amazon.com.
“We hope more SMEs can capitalise on the programme to kick-start their cross-border e-commerce business.”
Boost to property sector
The e-commerce boom is also set to be a boost to the local property market, with the industrial sub-sector being its biggest beneficiary.
According to the Valuation and Property Services Department’s (JPPH) Property Market Report 2017, the industrial sub-sector, though contributed the least to the overall property market last year , plays a significant role generating investments and employment opportunities.
“As Malaysia embraces Industrial Revolution 4.0 and the digital economy, a different ball game is expected of the industrial property sub-sector,” it says.
One initiative that is expected to support the sector’s performance, says JPPH, is the setting up of a Special Border Economic Zone in Bukit Kayu Hitam, which will be the new attraction for both domestic and foreign investors on the northern zone of Malaysia.
“Another is the establishment of a Digital Free Trade Zone (DFTZ), which will see KLIA as the regional gateway. The first phase of DFTZ is foreseen to have 1,500 small and medium enterprises participate in the digital economy and is expected to attract RM700mil worth of investment and create 2,500 job opportunities.
“On the same note, Cyberjaya will be transformed into a global technology hub and a smart city.”
In November, CIMB Research in a report said the industrial segment has a strong growth trajectory through acquisitions and organic growth, given the tight industrial space supply.
“Demand for new high-quality industrial assets will transform the segment, which has led to several new mega-distribution centres that carry high price tags as retailers start turning to logistics.
“Notably, UK-based retailer Marks & Spencer is building a 900,000-sq-ft distribution centre with one million products processing capability per day and will consolidate its 110 warehouses into just four.”
The sector is also expected to be bolstered by the growth of the e-commerce segment.
The growth in e-commerce, which in turn is spurring the online retailers sector, will lead to demand for larger warehouse spaces.
According to JPPH’s Property Market Report 2017, the industrial property sub-sector recorded 5,725 transactions worth RM11.64bil in 017.
“Compared with last year, the market volume increased by a marginal 2.1% but value declined by 3.1%. Most states recorded contractions in market activity but the commendable growth in Selangor and Johor at 19.5% and 9.5% respectively helped support the overall marginal growth.
“These two states accounted for 34.2% and 14% of the total market activity respectively. By type, vacant plots formed 31% of the total transactions, followed by terraced factory with 28.7% market share.”
JPPH says the industrial overhang remained minimal though the volume kept growing since 2016.
“There were 999 units worth RM1.51bil in 2017, showing an increase of 11.4% and 27.1% in volume and value respectively. Johor also took the lead in the industrial overhang with 40.7% (407 units) of the national total.”
JPPH adds that the industrial development front was less active as shown by the marginal increase of 0.4% in completion to record 1,851 units, whilst starts and new planned supply decreased by 20.7% and 34.3% respectively to 850 units and 710 units.
“As at year-end, there were 113,173 existing industrial units, with another 5,675 units in the incoming supply and 7,513 units in the planned supply.
“Prices of industrial property were stable across the board. One and a-half storey semi-detached factories in the Petaling District fetched between RM4.1mil to RM5.7mil. In Johor Bahru, similar factories in Taman Perindustrian Cemerlang ranged from RM2.3mil to RM2.7mil.”
As for the other property sub-sectors, the residential property market recorded 194,684 transactions worth RM68.47bil in 2017, which were 4.1% lower in volume compared with 2016, but they increased by a marginal 4.4% in value.
By price range, demand continued to be in the RM200,000 and below price points, accounting for nearly 45% of the residential market volume.
Last year saw 77,570 units of new launches, higher than those recorded in 2015 (58,411 units) and 2016 (52,713 units).
Kuala Lumpur recorded the highest number of launches in the country with more than 22,000 units. Its sales performance was at a low 19.5%, followed by Selangor with 13,522 units and Johor, 7,926 units.
The commercial property segment, meanwhile, continued to decline but at a modest rate, says JPPH. There were 22,162 transactions recorded worth RM25.44bil in 2017, down by 6.7% in volume and 29.2% in value compared with 2016.
The retail sub-segment’s performance was stable at 81.3% in 2017 compared with 81.4% in 2016, recording an annual take-up of more than 6.78 million sq ft.
Kuala Lumpur, Selangor, Johor and Penang saw a significant take-up rate as their newly completed shopping complexes secured commendable occupancy.
Johor was leading with nearly 2.82 million sq ft followed by Selangor (1.17 million sq ft), Kuala Lumpur (1.01 million sq ft) and Penang (778,833 sq ft).
MOST people are somewhat aware about the Fourth Industrial Revolution.
The first industrial revolution occurred with the rise of steam power and manufacturing using iron and steel. The second revolution started with the assembly line which allowed specialisation of skills, represented by the Ford motor assembly line at the turn of the 20th century.
The third industrial revolution came with Japanese quality controls and use of telecommunication technology.
The Fourth Industrial Revolution, or first called by the Europeans Industry 4.0, is all about the use of artificial intelligence, robotics, genomics and process, creative design and high speed computing capability to revolutionise production, distribution and consumption. Finance is a derivative of the real economy – its purpose is to serve real production. Early finance was all about the finance of trade and governments to engage in war.
It is no coincidence that the first central banks (Sweden and England) were established in the 17th century at the start of the First Industrial Revolution. Industrialisation became much more sophisticated as Finance 2.0 brought the rise of credit and equity markets in the 18th and 19th centuries. Industrialisation and colonisation came about at the same time as the globalisation of banks, stocks and bond markets.
Again, with the invention of first the fax machine, then Internet that speeded up information storage and transmission in the 1980s, finance and industry took a quantum leap into the age of information technology. Finance 3.0 was the age of financial derivatives, in which very complex (and highly leveraged) derivatives became so opaque that investors and regulators realised they became what Warren Buffett called “weapons of mass destruction”. Finance 3.0 stalled in 2007 with the Global Financial Crisis and was only propped up with massive central bank intervention in terms of unconventional monetary policy with historically unprecedented interest rates.
We are now on the verge of Finance 4.0 and it may be useful to explore what it really means.
The common definition of Industry 4.0 is the rise of the Internet of Things, in which cloud computing, artificial intelligence and global connectivity means that cyber-physical systems can interact with each other to produce, distribute and trade across the world in a massively distributed system of production.
But what does Finance 4.0 really mean?
What truly differentiates Finance 4.0 from the earlier version is the arrival of Blockchain or distributed ledger technology. The best way to think about the difference is the architecture of the two different systems.
Finance 3.0 and earlier versions were all about a top-down or hierarchical ledger system, like a pyramid, in which trade and settlements between two parties are settled across a higher ledger.
A simple example is payment from Joe in bank A to Jim in bank B is finally settled across the books of the central bank in local currency. But in international trade and payments, the final settlements (at least more than 60%) are settled in US dollar finally across the ledgers of the Federal Reserve bank system.
Finance 3.0 was not perfect and those who wanted to avoid regulation, taxation or any official oversight basically moved trading and transactions off-balance sheet and also off-shore. This was the “shadow banking” system that financial regulators and central banks conveniently blamed on their failure to see or stop the last global financial crisis.
Although technically the shadow banking system is the non-bank financial system, which would include bond, stock and commodity markets, the bulk of illegal, illicit transactions traditionally was done in cash.
Welcome to the technical innovation called cyber-currencies, which was made possible for peer-to-peer (P2P) transactions across a distributed ledger system (commonly known as blockchain). In architectural terms, this is a bottom-up system which technically can avoid any official oversight. Indeed, cyber-currencies or tokens were invented precisely because the users do not trust the official system.
As the populist philosopher Stephen Bannon said, “central banks are in the business of debasing the currency”. Hence, those who want to avoid the debasement of their savings prefer to deal with either cash or cyber-tokens like bitcoin (pic).
What is happening in the rapidly evolving Finance 4.0 is that as the world moves from a unipolar order to a multi-polar world in which other reserve currencies also contend for trade and store of value, the top-down architecture is fusing (or merging) with a bottom-up architecture in which trade, transactions and stores of value are shifting towards the P2P shadow system.
Why this is taking place is not hard to understand. Post-global financial crisis, the amount of financial regulations have tripled in terms of number of rules and complexity on what the official sector can regulate, which is mostly the banking system. It is therefore not surprising that all the innovation, talent and money are moving to outside the banking system into the asset management industry, which is much more lightly regulated.
No talented banker, however dedicated to the values of banking probity, can resist the temptations of working in asset management, away from the heavily regulated environment where he or she is 24x7 under regulatory internal and external oversight.
Another reason why the cyber-P2P business is flourishing is because the official sector is worried that further regulation would hinder innovation. But those who want to increase the complexity of regulation must remember that for every 50 foot wall, someone will invent a 51 foot ladder.
So competition in the 21st century has already moved from the physical and financial space into cyber-space.
If there is one thing I learnt as a former regulator, it is that if the banks are behind the curve in terms of technology, the regulators are even further behind, since they learn mostly from those whom they regulate. But if financial regulators deal with financial innovation through “regulatory sandboxes” where they allow their regulated banks to experiment in sandboxes, they are treating their regulated institutions as kids in an adult game of ruthless technology.
Time for the official sector to make their stand clear or else Finance 4.0 promises to be very different from the orderly world that they are used to imaging. Nothing says this clearer than a recent survey by the Chartered Financial Analyst Institute, which showed that 54% of institutional investors surveyed and 38% of retail believe that a financial crisis in the next one-three years is likely or very likely.
You have been warned.
- Tan Sri Andrew Sheng writes on global issues from an Asian perspective.
Blockchain is beginning to enter the spotlight as organisations see uses for it over and above the cryptocurrency Bitcoin. From combating fake degrees to being able to track the origin of organic products, blockchain is proving to be a reliable solution in trust.
The underlying technology that powers cryptocurrencies like Bitcoin and ethereum is blockchain.
Creating trust in transactions Varanasi: Blockchain can be used to store verified documents so that users don’t have to keep validating important documents every time it’s submitted to a new party.
While blockchain was confined to finanin cial tech the early days, many organisations are starting to employ it in other industries because the technology is highly secure and even allows for transparency.
This encourages trust and in some cases even eliminates the need for a third party to validate the data, making it valuable to many organisations.
WITH fake doctorates and degrees becoming increasingly common, how are employers and graduates to find an efficient way to bridge the gap in trust?
According to Dr Mohamed Ariff Ameedeen, from University Malaysia Pahang (UMP), the solution could lie with blockchain technology.
As director of IBM’s Centre of excellence, which has been based in the university since 2012, he is continuously exploring novel uses for blockchain beyond cryptocurrency.
he said one of the early ideas the team was working on was a secure database that would prevent students from hacking to change their grades.
however, his team then decided to solve a more pressing issue affecting universities – fake degrees.
Mohamed Ariff said some universities are already integrating QR codes into graduates’ certificates to help validate credentials. however, even QR codes are now easily tampered with.
Taking it one step further, the UMP team created a system called Valid8, a QR code linked to a student profile secured by blockchain, which contains the student’s name, photo, title of degree and the year it was awarded.
This made tampering with the QR code pointless, as it only acted as a key to the information on the blockchain.
“even if someone used another person’s QR code, the data would clearly show it was not the person’s name or photo connected to the certificate,” he said.
he added that all the info placed on the blockchain is already publicly available so it would not compromise the students’ privacy.
Mohamed Ariff said making the data trustworthy meant time savings – as employers don’t have to contact the university to verify the certificate, they can be quicker in deciding if they should hire the job applicant.
So far, UMP has run a pilot programme with Valid8 by issuing supplementary certificates to 180 graduates from the industrial Management Faculty.
Mohamed Ariff said it took a couple of days to configure the blockchain node and a few more days to input the 180 students’ data.
“Although entering the information is relatively straightforward, migrating 15 years of old data (of earlier graduates) that includes more than just the initial four data points is going to take a bit longer,” he said.
The full-scale test for Valid8 will be the students graduating at the year-end convocation, estimated to be around 2,000.
To make the student profiles more useful, Mohamed Ariff said the team is planning to add more information such as grades, attendance, courses and maybe even disciplinary records.
“The beauty of blockchain is that it can grow with time and track a student’s academic life. imagine how much data it would have if a profile was set up for students when they entered kindergarten,” he said.
To encourage such a situation, UMP is open to collaborating with other universities that wanted to adopt blockchain for student iDs.
however, eduValue founder Barry Ew Yong warned that even a secured system has an obvious point of failure – human error.
he added that once errors entered the system there is a chance that it will be perpetuated. “Technology does not increase trust. Systems increase trust, though technology can be a useful tool to do so,” he said.
Like with UMP’s Valid8, the quality assurance startup has adopted blockchain to secure graduate certificates, using the technology to store a softcopy of the degree.
The company serves around 30 private schools, mostly tertiary schools offering up to Masters. Founded in Singapore in December 2012, it only just started employing blockchain.
he said the company uses a two stage system to ensure that only qualified students would be given certificates.
in the first stage it will help set up the standard by which students will be evaluated in order for them to graduate, and the approval process will be audited – schools found lacking will be struck off the system.
in the second stage it will vet all data being uploaded to the platform.
For UMP this is just a start – it’s also testing a blockchain based e-wallet called Xchain that students, lecturers, staff and vendors would eventually use for all transactions in UMP.
Beyond the security benefits, Mohamed Ariff said the open-nature of blockchain’s shared ledger meant the spending patterns could be analysed, making the university a giant data pool.
“With a population of 13,000 users, there’s a lot of potential data. And as a university, we love data,” he said.
Xchain is still in beta as the team is waiting to get Bank Negara to issue it an e-wallet license.
Mohamed Ariff concluded that blockchain is promising, especially for the education field, which relies on data that is open to peer review while also being trustworthy and tamper-evident.
ACADEMICIAN hu Dong, who advises Shanghai Jiaotong University’s Zero Bay incubator, said the supply chain industry could see huge advantages by having a more efficient and transparent data manto agement system.
Blockchain can be used track a product’s origin and determine if the materials were sourced as claimed, which is invaluable to sectors such as organic farming and ethical diamond mining. Also, by tracking the product’s trail along each stop on the supply chain, should an issue arise that requires a product to be recalled, the company could zero in on where the fault occurred.
For example, if a company found that the computer it’s making has a faulty hard drive, it would be able to identify which one of its factories was responsible. it then only needs to recall the computers that originated from the affected factory instead of all its products.
This would save cost as the recall will be smaller
and speed up the process which could help limit damage to the company’s reputation.
Dong, who was in Malaysia for a conference by blockchain incubator WeMerge, said the highlight of blockchain is accountability and transparency so it would create a higher degree of trust, which makes it great for smart contracts.
A smart contract can digitally facilitate, verify, or enforce the performance of a contract without the need for third parties. And if executed via blockchain, the transactions are trackable and irreversible.
He said smart contracts could ensure factories, for instance, get paid faster, as the payment can be released once the contract is verified through the blockchain instead of waiting for a third-party to process it.
Startup Eximchain, which has raised US$20mil (rM78.41mil) in funding to continue developing blockchain solutions, is offering Smart Contracts.
Its solution allows banks to verify the validity of orders and provide the necessary financing; and the transaction history can be used by suppliers to prove their reliability to buyers and rating institutions. For banker turned blockchain technologist Bobby Varanasi, limiting the technology’s application to Bitcoin is just shortsighted.
The co-founder of Thynkblynk Technologies, along with partner Parag Jain, have developed ChainTrail, a “trust platform” for storing verified documents, including education certificates, medical records and contracts.
By using ChainTrail, you don’t have to keep verifying a document each time it’s presented to a new party.
However, Varanasi said the company was not in the business of certification and that the onus was on the data provider, be it a university or bank, to ensure that the data is correct.
“A lie, once committed to blockchain, would become an immutable one,” said Jain, referring to how data can only be added but not modified on a blockchain.
To mitigate such risks, ChainTrail vets customers by validating their credentials and ensuring that they are authorised to represent stakeholders.
For instance, it would verify that a lecturer is from the university he or she claims to represent.
It also offers templates for agreements such as contracts and term sheets.
“In today’s world, lack of trust is increasingly permeating the world of trade, both politically and financially... blockchain as a tech has finally presented an opportunity to create trust amongst a variety of parties that transact with each other,” said Varanasi.
Chain of trust:
Built for cryptocurrency Bitcoin, blockchain is being used in innovative ways in a number of industries.
Basics of blockchain
LIKE a lot of complex technologies, blockchain is easier to understand once you break it down.
A blockchain is made up of a block of “transaction data” which is why it’s also called a ledger. Each block also has a hash – a string of numbers which uniquely identifies the block.
And similar to how a person has their parent’s names added to theirs, a block features a portion of the preceding block’s hash.
Put in terms of family lines, it’s like how you could tell that Amir bin Ali is the son of Ali bin Abu, who is in turn the son of Abu bin Bakar, and so on.
Basically, the hash “chains” the blocks together, by affirming their place in relation to the blocks before and after, hence the term blockchain.
Security in numbers
A key feature of blockchain is security. Blockchain runs on the paraphrased adage that you can fool some of the people some of the time, but not all the people all the time.
So rather than making it tamper-proof, blockchain is tamper-evident – this is done by making a copy of the blockchain available to all members of the network, which is why blockchain is sometimes referred to as a public ledger.
As members of the network all have a copy of the same blockchain, if anyone’s chain is compromised by a hacker, it would look different from others.
If you have ever tried to organise a movie night with an extended group of friends on a WhatsApp group, you’ll get the idea.
Say, you want to watch Marvel’s Avengers: Infinity War and get the ball rolling by choosing the day and cinema, and then ask whoever that’s interested to add their names to the list.
The original message can’t be altered as it has been sent to the group. Instead everyone adds to the data by including their names and maybe a request for a specific timeslot. This concept is called “persistence”, wherein the older data cannot be retroactively altered.
Though a cheeky friend could change the date to try to troll the group, he wouldn’t be able to hide the fact that earlier messages will show a different date. This is what makes a public ledger like the blockchain tamper-evident.
Blockchain transaction
The blockchain is stored on computers, also known as nodes, that are connected via a peer-to-peer network.
No intrinsic value: Unlike enterprises, bitcoin has no business, no intrinsic value, no cash flows and no balance sheet. — AFP
I JUST returned from a meeting of the Asian Shadow Financial Regulatory Committee in Bangkok.
The group comprises Asian academic experts on economics and finance. Their role is to monitor the state of the world economy and the workings of its financial markets in the light of existing and prospective policies; and draw lessons and give advice on vital public policy issues of current interest to regulators and market practitioners to make the world a better place.
The group comprises 23 professors from 14 countries, coming from a diverse group of universities and think-tanks, including the universities of Sydney and Monash, and of Fudan, Hong Kong and Sun-Yat-Sen in China, Universitas Indonesia, universities of Tokyo and Hitotsubashi, Yonsei and Korea universities, Sunway University, Massey University in New Zealand, University of the Philippines, Singapore Management University, National Taiwan University, Chulalongkorn University and NIDA Business School, University of Hawaii and University of California at Davis, University of Vietnam, and Tilburg University in the Netherlands.
They examined key issues surrounding the theme: “Cryptocurrencies: Quo Vadis?” focusing on the role and activities of the flavour of the month, bitcoin. At the end of it all, they issued the following statement:
“Cryptocurrencies in general, and bitcoin, in particular, have been receiving considerable press of late, driven mainly by wide swings in value in the cryptocurrency exchanges. There are now in excess of 2,500 products considered to be cryptocurrencies and in the last three weeks alone their combined market value has plummeted from US$830bil to US$545bil as of today, of which US$215bil is attributed to bitcoin and bitcoin cash.
To keep this in perspective, however, Apple Inc has a market value of US$880bil as of today. Market value measures the equity value of a business – or what investors are willing to pay for its future profits. Unlike enterprises, however, bitcoin has no business, no intrinsic value, no cash flows, no profit and loss statement, and no balance sheet. It is a speculative instrument.
Cryptocurrencies, including bitcoin, are not considered currency today because they are not a universal means of payment, nor a stable store of value, nor a reliable unit of account. Buyers purchase on the basis that these cryptocurrencies would rise in value. While market value has been the main focus of the current interest, the more important issues are around the role of cryptocurrencies both as financial assets, and the role they can play in transaction settlements, and their implications, if any, on financial stability.
While there is much interest in cryptocurrencies, especially bitcoin, the volume of transactions remains very small currently. For example, total US dollars (cash) in circulation amount to US$1.6 trillion as of today. M3 (broad money) is valued by the Federal Reserve at US$14 trillion. Total US economy assets in 2016 were valued at US$220 trillion. So why the fascination with cryptocurrencies? Supporters of Bitcoin claim it to be a superior store of value to fiat money issued by central banks because its supply is limited by design and therefore cannot be debased. In addition, the technology behind bitcoin, called the Blockchain, provides anonymity to its players. That is why it is a favourite with money launderers, tax evaders, terrorists, drug smuggler, hackers, and anyone who wants to evade the rule of law. Many people who use cryptocurrencies assert that they pay minimal transaction costs mainly because it avoids the cost of financial intermediation.
Still, there is large potential for capital gains because of the wide volatility of its price movement. This is the main driving force behind the popularity of cryptocurrencies like bitcoin. However, there are high risks involved including extreme volatility and opaque, unregulated exchanges that are prone to cyberattacks.
Authorities and regulators worry about bitcoin because they fear it is a bubble. In the event of a bust, investors in bitcoin – they are many, spread over various continents and countries – will be hurt; and they exert pressure on governments to regulate this business in order to protect investors.
In addition, they worry about the impact – in the event that cryptocurrency trading becomes a significant element in maintaining financial stability – in terms of the impact on the transmission of monetary policy and on its effects on the banking system, and most of all, on systemic risk, if any.
Authorities have responded in different way. In South Korea, new regulations today require banks and exchanges to identify who their customers are, imposing greater transparency in the conduct of the cryptocurrency business. On the other hand, Japanese authorities are more liberal. They only require the registration of companies engaged in this business at this time.
Many other authorities, including those in the US, are adopting a wait-and-see attitude while studying the issues, recognising that there may be a role for them to introduce some regulatory measures in the event that the volume and price volatility of cryptocurrency transactions become more and more significant.
In the meantime, government and tax authorities feel uneasy about the impact on revenue collection. Other regulators are worried about crowdfunding through ICOs (initial coin offers). Authorities in a number of countries, including the US, have introduced measures to regulate the issue of new ICOs to ensure that investors are provided with the necessary information before making such investments.
At the same time, central banks in many countries are looking into the desirability and possibility of issuing their own digital currencies, including to counter privately-issued cryptocurrencies.
Recommendations:
1. Bitcoin came into prominence because of an apparent lack of confidence in fiat currency. It is imperative that governments and central banks continue to give priority to (i) protecting the integrity of their currencies; (ii) designing policies to contain inflation to prevent it from debasing the currency; and (iii) strengthening their mandate to promote financial stability over financial development, if needed (including ensure fintech development does not undermine confidence). Also, in cases where authorities do not have the power to regulate the cryptocurrency business, they should actively seek such authority where appropriate.
2. Monetary authorities should be open to creating digital currencies rather than confining their money supply to notes, coins and deposits. But they should do so in a transparent manner and only after careful consultation and study.
3. It is the role of government to warn their citizens and investors about the high risk involved, and ensure transparency in bitcoin activity, and not to unduly introduce more and more regulations that will stifle innovative initiatives. Blockchain technology, for example, does have other useful applications apart from the issue of its use in the creation of digital currency.
Investor protection
As we see today, bitcoin and the other cryptocurrencies are not currencies. Mostly, they reflect speculative activity. Hence, investing and transacting in them involve high risks. It is imperative that investors realise this and approach investing in cryptocurrencies with great caution and with as much information as is available to help them manage these risks.
Investors must fully understand that cryptocurrency prices need not necessarily always rise, particularly because they have no intrinsic value, they could just as easily fall. So investors beware: Caveat emptor.” Update
The following developments are noteworthy:
> Columbia’s Prof N. Roubini (Dr Doom) claims bitcoin is not a currency. Few price anything in bitcoin. Not many retailers accept it (even bitcoin conferences don’t accept it as payment). And it’s a poor store of value because its price can fluctuate 20%-30% a day. Worse, he labelled it “the mother of all bubbles” because its claim of a steady-state supply is “fraudulent”.
It has already created thee similar currencies: Bitcoin Cash, Litecoin and Bitcoin Gold. Together with the hundreds of such other currencies invented daily, this creation of money supply is debasing the currency at a much faster pace than any major central banks ever did. Furthermore, bitcoin’s claimed advantage is also its Achilles’s heel – for, even if it actually did have a steady supply of 21 million units, it is not a viable currency because the supply won’t track potential nominal GDP growth; hence, prices will become deflationary – the kind of phenomenon that economist Irving Fisher believed caused the Great Depression.
Indeed, the head of the European Central Bank had since declared to the European Parliament that cryptocurrencies are unregulated and “very risky assets. Their price is entirely speculative”. That’s not what we want or need. It’s a pity the FOMO (fear of missing out) of many retail investors will end them in a wild goose ride!
> Over its nine-year history, bitcoin has had five-peak-to-trough falls of more than 70% each. The recent decline offers a dose of reality to new investors – bitcoin dropped to a low US$7,850 on Feb 2 for the first time since November 2017 – crashing 60% from the high of nearly US$20,000 in mid-December. Sentiment has shifted dramatically this year.
On Feb 5, it fell another 4% to US$7,524. Also, the fledging market has taken a number of blows: Facebook has since banned advertisements on it (for being misleading); US Securities and Exchange Commission has accused some latest ICOs as “outright scams”; US and UK largest banks have put up “road-blocks” to financing bitcoins; and the recent Japanese hack theft of 523 million crypto-XEM (worth US$500mil) brought back memories of Mt Gox, which collapsed after a similar hack in 2014.
> Arbitrage traders (buying where it’s cheap and reselling where it is dear) have been active – taking advantage of price differentials in multiple places and different times. They call it “capturing the arb”. Hedge funds, high frequency traders and even amateur enthusiasts are giving it a shot. Price divergences can be due to glitches or network traffic jams. In South Korea, exchanges quote abnormally wide prices reflecting high investors’ demand for bitcoin in the face of strict capital controls – giving rise to a “Kimchi premium” (of as high as 50% above US price; now down to 5% as price disparities are swiftly traded away).
> Concern over cryptocurrency activity is spreading beyond China, Japan, South Korea and India. This prompted the governor of the Bank of England, who also chairs the Global Financial Stability Board, to voice his unease over the anonymity embedded in blockchain technology underlying their use, especially for illicit activity (including money laundering). He disclosed that it would be on the agenda at the next G20 meeting. Tax authorities have also expressed concern over the under-reporting of capital gains tax.
> Bitcoin futures trading on Chicago’s CME and CBoE exchanges have been slow to catch fire – at the pace of a “slow walk”.
What then, are we to do
Reality check: Bitcoin is proving that cryptocurrencies can erase wealth as fast as they create it. In January 2018 alone, it wiped off US$45bil from its US$200bil in market value generated in all of 2017 – the biggest one-month loss in US dollar terms in its short history. Since then, more value is being lost. For most economists and finance experts, they don’t represent an investable asset – there are liquidity issues, safety issues, exchange issues; most of all, they have no intrinsic value.
Can’t realistically put a fix on their fair value. They are for speculators who are prepared to lose everything. Of course, its something else for those who use them for illicit activity (home to criminals and terrorists), including money laundering. Anonymity means you are potentially closing a chain, while at somewhere along it had some illicit activity that cannot see the light of day.
Fair enough, these concern regulators. But we shouldn’t lose sight of the huge range of opportunities presented by the underlying technology – a view shared by many in relation to raising the efficiency of payment systems. Regulators are right to want to regulate crypto but also, continue to encourage innovation on blockchain. As I see it, so far in 2018, bitcoin has been a total dud. The list of factors driving its decline is growing, especially rising regulatory clampdown occurring around the world.
So, the cryptocurrency market has fallen on tougher times. For sure, Bitcoin has been highly profitable for many investors. Indeed, there continues to be strong interest among millennials.
Bottom line: the year so far has been terrible for bitcoin. But the fundamental positive story for crypto appears to remain intact. Protecting consumers should make it harder for charlatans to sell digital dust. There is a point where it goes from “buying on the dip” to “catching a falling knife”. Only time will tell. So, beware!
NB: Following global regulatory crackdown, bitcoin’s price has on Feb 6 fallen to a low of US$5,947, wiping out over US$200bil so far this year. Bitcoin’s market cap is now US$109bil, about one-third of the total crypto market (that’s down from 85% this time last year). The Bank for International Settlements (banker to central banks) has now condemned bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster” (refers to huge amounts of electricity used to create it) and warns it can even become a “threat to financial stability”.
By Lin See-yan - what are we to do?
Former banker Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015) and Turbulence in Trying Times (Pearson, 2017). Feedback is most welcome.
Tough stand: Dimon has warned that he will fire JPMorgan traders who traded in bitcoin ‘in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.’ — AFP
NEW YORK: JPMorgan Chase & Co chief executive officer Jamie Dimon said he will fire any employee trading bitcoin for being “stupid.”
The cryptocurrency “won’t end well,” he told an investor conference in New York on Tuesday, predicting it will eventually blow up. “It’s a fraud” and “worse than tulip bulbs.”
If a JPMorgan trader began trading in bitcoin, he said: “I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.”
Bitcoin has soared in recent months, spurred by greater acceptance of the blockchain technology that underpins the exchange method and optimism that faster transaction times will encourage broader use of the cryptocurrency.
Prices have climbed more than four-fold this year – a run that has drawn debate over whether that’s a bubble.
Bitcoin initially slipped after Dimon’s remarks. It was down as much as 2.7% before recovering.
Last week, it slumped after reports that China plans to ban trading of virtual currencies on domestic exchanges, dealing another blow to the US$150bil cryptocurrency market.
Tulips are a reference to the mania that swept Holland in the 17th century, with speculators driving up prices of virtually worthless tulip bulbs to exorbitant levels.
That didn’t end well.
In bitcoin’s case, Dimon said he’s sceptical authorities will allow a currency to exist without state oversight, especially if something goes wrong.
“Someone’s going to get killed and then the government’s going to come down,” he said.
“You just saw in China, governments like to control their money supply.”
Dimon differentiated between the bitcoin currency and the underlying blockchain technology, which he said can be useful.
Still, he said banks’ application of blockchain “won’t be overnight.”
The bank chief said he wouldn’t short bitcoin because there’s no telling how high it will go before it collapses.
The best argument he’s heard, he said, is that it can be useful to people in places with no other options – so long as the supply of coins doesn’t surge.
“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than US dollars,” he said.
“So there may be a market for that, but it’d be a limited market.”— Bloomberg
