Year: 2018

Top 5 regulatory concerns currently facing financial institutions

Posted on by Ashton Wenborn

Achieving regulatory compliance has become a daily focus for financial institutions of all sizes. Although meeting these standards is no small task, there is no other option; the cost of non-compliance is much too high. Whether it’s debilitating fines or being named and shamed, no company wants to be called out. As such, firms need to understand the biggest regulatory challenges facing the financial sector and take steps to address them.

The broad scope of regulation
First and foremost, firms must recognise the sheer volume and breadth of regulation in existence. There are currently more than 750 global regulatory bodies and governing businesses, which means financial organisations are under the microscope; no company can escape compliance standards.

Each regulation comes with numerous clauses. For example, the Dodd-Frank Act, which was passed in response to the financial crash, has 2,300 pages of regulations that financial institutions must comply with. The abundance of legally enforced guidelines has a financial and operational knock-on effect for businesses, and the costs of compliance are only rising.

There are currently more than 750 global regulatory bodies and governing businesses in operation, which means that financial organisations are under the microscope

Managing risk
The scale of regulatory requirements isn’t the only issue that firms need to consider; complex risk calculations also demand their attention. Risk management is likely to pose a major challenge for many firms, in part because of the real-time calculations that are needed to comply with regulations such as Basel III.

Calculating risk has long been a manual process. As such, the infrastructure to cope with new demands for risk management is simply not in place. Firms are only just starting to realise that some level of automation is required to avoid falling behind.

Additionally, firms are working to build their three lines of defence, particularly with surveillance and controls processes becoming an integral part of compliance procedures. Firms should be looking to track, timestamp and easily recall specific data points as part of these procedures, especially as regulators, and the industry at large, have come to expect a certain level of transparency.

Knowing the customer
The financial sector must respond to increasing concerns about money laundering and terrorist financing. Even if a bank launders money unknowingly, it will still face huge repercussions from regulators. As a result, know your customer processes, which see businesses carrying out appropriate background checks for all clients, have become a priority for the industry. However, this puts huge pressure on the staff processing this information manually.

Errors can occur, and information risks being mismanaged unless employees receive the appropriate training and support. As such, it’s vital that staff are given the right tools to record client information accurately.

Reporting standards
Recording information is vital to regulatory compliance. However, the method of recording required depends on the country the business is operating in. For international banks, this means varying the recording standards used across different countries – from the US Generally Accepted Accounting Principles to the International Financial Reporting Standards.

As a result of these different standards, banks often find themselves doubling up on work and investing a huge amount of time in meeting these requirements. Financial institutions dealing with numerous reporting standards must streamline each method in order to consolidate all the data.

Data management
The legal implications of data storage are perhaps one of the most understated challenges of regulatory compliance. Depending on the circumstance, firms may need to hold specific client information for several years, which can put a strain on the employees who need to provide this data to regulators, should it be requested.

Poor data management can have major repercussions for firms; those with inadequate data management procedures have been forced to improve their document processing capabilities very quickly or risk facing legal action.

Regulation in the financial services sector will continue to pose a challenge to firms both large and small. Compliance is not just about recognising the key regulatory pressures facing financial institutions, but also proactively ensuring the company is improving its processes and streamlining its operations. As the challenges around compliance continue to put pressure on firms, finding new solutions and methods will be vital.

The multifarious benefits of a diverse boardroom

Posted on by Max Tomlin

In the modern business world, organisations have to constantly adapt in order to achieve sustainable growth. In recent decades, this adjustment has taken the form of recruitment, with institutions in both the public and private sectors seeking to diversify their workforces. And yet, while some companies preach the importance of diversity in the workplace, many fail to fully embrace it, simply fulfilling quotas with little regard for the benefits different perspectives provide at board level.

Diversity in the boardroom is not simply a game of numbers or ratios, but rather a way of making boards function more efficiently and effectively

Studies have shown that diversity, whether in the management team or the boardroom, adds value to an organisation. In fact, a Forbes report entitled Global Diversity and Inclusion: Fostering Innovation Through a Diverse Workforce identified diversity and inclusion as key drivers of internal innovation and business growth – something no company can hope to succeed without.

According to McKinsey & Company, companies with diverse executive boards also enjoy significantly higher earnings and returns on equity than those favouring a single demographic. Evidently, a diverse board is better positioned to understand its customer base and the business environment in which it operates.

Finding the skills balance
Most companies’ customers are not homogeneous – at least 50 percent are female and, in most cases, do not have similar backgrounds. It therefore makes little sense that those with the most power and influence in an organisation share exactly the same skill sets and experience as one another. Although gender is often the factor most associated with workplace diversity, it is important that organisations appreciate the backgrounds, experiences and perspectives of all staff members. Whether it relates to age, expertise, gender, experience or nationality, a boardroom willing to embrace different points of view will have a better chance of thinking creatively, fostering growth and meeting the business demands of the 21st century.

One of the key considerations often overlooked by organisations appointing new board members is the need to accommodate a variety of specialised skills, with listed companies regularly filling their management bodies with the most financially proficient individuals. Of course, it is important to have board members that understand financial statements and adequately monitor internal financial controls in the context of the appropriate sector. But given the increasingly digital environment most businesses operate in, having a technology expert on the board could be the decision that proves most strategically advantageous for a company in the long term.

Technological advancements, cybersecurity concerns and changing regulatory requirements have made tech literacy a prerequisite of any future success. As such, technology and information are assets that should be governed in a way that supports the organisation in setting and achieving its strategic objectives. In order to appropriately take charge of this responsibility, boards need to have a keen insight into the IT department, thereby further emphasising the necessity for specialised skills. Another way to enrich the skill set of a boardroom would be to have a specialist in human capital management present. Most organisations argue their workforce is their most valuable asset, yet very few boards have an individual with expertise in this area.

Rethinking the recruitment approach
Diversity in the boardroom should not be an empty slogan adopted to comply with regulations or best practices. It is not simply a game of numbers or ratios, but rather a way of making boards function more efficiently and effectively. A board’s oversight responsibilities include recognising and assessing significant opportunities and risks, counselling strategic decisions and assessing the performance of the CEO. In order to effectively manage these functions, a board must be comprised of individuals that are experienced, responsible and collaborative. Further, it must foster an environment in which opposing opinions are welcome, decisions can be challenged and trust is implicit.

As James Surowiecki, an American journalist and the author of The Wisdom of Crowds, said: “Diversity and independence are important because the best collective decisions are the product of disagreement and contest, not consensus or compromise.” Independent thought is necessary for engendering innovation, growth and, most importantly, good decision-making. The ability to effectively question and challenge management, therefore, should be considered as a leading principle of corporate governance.

Despite this, an Institute of Directors report entitled Diversity in the Boardroom found most board members were recruited on the back of a non-formal recommendation. In fact, a significant number of the respondents explained that they were directly approached by the board or a member of the board about the position, while 67 percent knew up to three or more of their fellow board members before joining. This proportion rose to 71 percent in the financial services sector. Worryingly, female respondents didn’t share the same experience.

Boards are often described as being ‘male, pale and stale’, so looking to those with different perspectives is a way of constantly challenging and critically reassessing the status quo. The European Confederation of Directors’ Associations recognises the involvement of independent non-executive directors on the board as a key step in the governance evolution of a company. Independent directors bring a balanced perspective to the boardroom by assessing matters in a more objective fashion. With this in mind, it is of great importance that the composition of a board is examined annually to determine whether homogeneity might lead to groupthink, which inevitably inhibits new and progressive ideas.

Deloitte’s 2014 Board Practices Report: Perspectives from the Boardroom found only marginal evidence of age diversity in boardrooms, with so-called ‘younger directors’ often aged well into their 50s. But younger executives are now making the move into the boardroom, much to the benefit of those employing them. While older directors provide a wealth of knowledge gained through experience, younger directors contribute a fresh perspective and a new set of skills fit for the modern world: an attribute that should not be underestimated.

Adapting to change
A board built on a handful of relationships has the inherent risk of insularity, with homogeneity often acting as a hindrance in an increasingly dynamic environment. Traditionally, boards have recruited from a handful of C-suite executives, but companies are now realising that it is the breadth of perspective, not the mere inclusion of diverse traits, that benefits the organisation. Looking to business unit heads, regional leaders, academics, entrepreneurs, government leaders and other executives can create a wider, more diverse pool, bringing interesting and insightful perspectives to the boardroom.

Unfortunately, opportunities are still limited in many organisations around the world. Findings suggest the majority of boards still lack a comprehensive process for making changes to the composition of the board. It appears the principal reason for recent or pending changes is the retirement or resignation of existing directors, rather than the result of any sort of review process. In order to avoid this kind of stagnation, organisations should ensure they introduce a robust diversity policy, one that caters to all aspects of diversity and allows appointments to be made on merit, not as a result of positive discrimination. That said, it may be necessary – at first, at least – to set a target for female and ethnic representation, as cronyism often blinds board members to the merits of those with different backgrounds or views. Once the benefits of diversity have manifested, however, appointments can be made on ability – and less emphasis can be placed on fulfilling quotas.

At Bank of Cyprus, we have embraced diversity and all the benefits that come with it. We make appointments based on merit and constantly aim to identify members of diverse backgrounds who can bring new skills to the board. Further, we aim to achieve 40 percent female representation by 2020. Our board members are a mix of ages and professions, with a fairly even balance of international and local members. We have also widened our pool of candidates through the use of recruitment agencies, ensuring we uphold the best governance practices and continue to identify the best talent in the future.

As a result, Bank of Cyprus is the only financial institution in Cyprus that fully complies with both the Code of Corporate Governance set out by the Cyprus Stock Exchange and the corresponding code set out by the Financial Reporting Council in the UK. A further 18 authorities from four separate jurisdictions (Cyprus, Ireland, the UK and the EU) also regulate the bank. Through this high level of commitment to best practices and corporate governance, Bank of Cyprus has continued to set industry standards at home and abroad.

Promoting diversity within a corporate world

Posted on by Max Tomlin

April 2018 saw the deadline for the new gender pay reporting regulations pass, and it is clear that there is still some way to go before there is pay parity between the genders. In 2010, the European Commission officially named gender balance as a priority on its political agenda. Yet, eight years on, it is questionable whether this is a reality in the UK’s financial sector. Meanwhile, the Financial Conduct Authority has recently called on the sector to work harder to address issues around diversity and misconduct. How is the sector responding to the growing focus by regulators, government and the media on the wide spectrum of issues related to gender?

At a macro level, international regulatory and government bodies have been attempting to create equal opportunities and minimise the number of women out of work

Does the gender pay gap reveal all?
Those working in financial services, particularly women, have long suspected a wage gap between the genders. The recent UK gender pay reports, however, have quantified this suspicion. In January this year, the Financial Times reported that financial services stood second only to construction as the sectors reporting the largest pay gaps, based on those companies that had published figures to date. Alongside the UK’s legislative efforts, Germany has similarly introduced schemes to promote transparency in wage structures. However, the results demonstrate that while sentiment may have changed and some legislative efforts been made, the reality is still far from ideal. Beyond the UK, only 25 percent of board members of the largest publicly listed companies in the EU are women. This does, however, mark a significant increase from 11.9 percent in 2010. In fact, France is the only country within the EU that has over 40 percent of women on boards. It seems women in business across the world are less likely to reach senior positions, which partly amounts for the increasingly reported pay gap.

What can be done to promote diversity in a corporate world?
Senior business executives must stimulate change through leading by example. As specialist recruiters to the sector, we at ea Change Group aim to model best practice and focus on the candidates with the best skill sets and potential to perform in roles, rather than allowing unconscious bias to creep in. An approach we recently took when engaging with a financial institution regarding equality was to analyse their advertising campaigns, which highlighted an alarming lack of diversity. Conducting an external image audit allows an organisation to identify the misalignment between the diverse professional environment they are striving for and the image they are presenting to the public, and consequently realign their external image to mirror their commitment to a diverse workplace.

At a macro level, international regulatory and government bodies have been attempting to create equal opportunities and minimise the number of women out of work, with schemes such as the EU’s package of policies that promote a work-life balance for parents. Countries such as Malta and Denmark are adopting incentive programs to encourage fathers to use parental leave schemes. These legislative efforts can, however, only go so far. Diversity must be created and supported from within each organisation.

Stepping forward with communication
Recent momentum demonstrates that cultures that inhibit diversity are being proactively tackled. The #MeToo movement and UK’s gender pay gap reporting requirements have brought sexual harassment and wage inequality into the media and regulatory spotlight. To be most effective, though, change must be driven from the bottom up. We have seen the most successful results for creating a diverse workplace come from organisations that communicate their targets, objectives and vision effectively. Where firms have a clear vision of the kind of workplace they want to be, and communicate that successfully –  both internally and to external consultants – measures like gender quotas and reporting targets become less necessary and change naturally follows.

A look to the future: leading by example
In my experience, the majority of individuals working in the sector are respectful of their peers and are focused on the job. Change is happening, and we know that diversity in business is a recipe for commercial success: the sector is moving in the right direction. Taking stock of the last few years within the financial services sector, it is clear that successful organisations will capitalise on the current momentum to secure fairer, more diverse workplaces, seek to drive change from within and lead by example.

Makkas Winery reviving Cyprus’ fine wine traditions

Posted on by Max Tomlin

Cyprus is one of the oldest wine-producing countries in the world. So old, in fact, that recent archaeological research has shown that the island has been producing wine for more than 5,500 years. Indeed, many ancient and mythological instruments refer to Cypriot wines – especially with regards to Nama wine, otherwise known as Commandaria. It is also said that Nama was used in ceremonies worshipping the goddess Aphrodite.

Cypriot wines can proudly stand besides the produce of any country known for its fine wines

In Shakespeare’s Antony and Cleopatra, Mark Antony gave the island to his beloved Egyptian queen, saying to her that she is as sweet as Cypriot Nama. Another 12 centuries later, while leaving Cyprus, Richard the Lionheart stated that he had to return to the island just so that he could taste Cypriot wine once more.

Today, Cyprus has 55 wineries, 90 percent of which are small and family-run. Despite their small production scales, Cypriot wines can proudly stand besides the produce of any country known for its fine wines; distinctions in international wine competitions are further proof of the quality of Cypriot wine.

When Makkas Winery first started producing wine, we had the privilege of having the expertise of two internationally respected experts and winemakers in our team – Samuel Harrop, a Master of Wine from France, and Duncan Forsyth, who had previously worked at the leading Mount Edward winery in New Zealand. Upon taking them to a new vineyard that we were developing at the time, I knew we were onto something special when I heard one of them say to the other: “If only I had such soil.”

The importance of family roots
A local family originally owned the winery, but they were not willing to invest the necessary funds during the initial phase of operations, which is certainly the most difficult. Consequently, they could not bring profitability to the company and had to shut down.

Fortunately, the current management team was able to convince the family to keep the company alive. They did this by pledging to honour the previous generations who had worked hard under adverse conditions to create these beautiful vineyards. Without their involvement, it was clear to the family that the labour of previous generations would have been lost.

5,500

Number of years Cyprus has been producing wine

55

Number of wineries in Cyprus

333,000

Number of bottles produced by Makkas Winery each year

The new team thus took the responsibility to achieve all of the difficult goals that were required to make the winery viable and competitive, while also creating a foundation for its further development. The main objectives, which had to be achieved simultaneously and within the shortest possible time frame, were to produce high-quality wines while also boosting sales and revenue. In this regard, diversification and increased production was key – this strategy also helped with market penetration.

As some of our wines reach their optimum quality after staying in the bottle for between five and seven years, we had to create a substantial stock, especially for six of our wine labels, so as to ensure increased sales year after year. This step would also allow us to expand into international markets, thereby reducing our dependency on the local market.

The next step was to develop our vineyards in order to further improve both the quality and range of our wines, in addition to gradually becoming more self-sufficient in terms of grape intake, as most of the local wineries purchase part of the grapes they use from independent vineyard owners. This involved creating the necessary infrastructure, in terms of both equipment and expertise, to achieve all the objectives that we set out for Makkas Winery.

Scooping up accolades
Under its new leadership, which took over in 2009, Makkas Winery which started operating with a small production of 20,000 bottles of wine across four labels. Within just nine years, production had increased to 330,000 bottles per year, encompassing 14 different labels and 18 bottling options.

Following the positive response we received from customers, we decided to enter our wines into numerous competitions around the globe. During the period between 2009 and 2016, Makkas Winery won 87 ratings within the awards range in international wine competitions. In 2016, all nine wines under the Makkas umbrella were entered into the Decanter World Wine Awards, with our winery receiving excellent ratings for its entire range.

In 2014, we participated in a European programme for innovation in the vinicultural sector and won the only two innovation programmes in the entire European Union.

The first was the comprehensive vineyard management programme, which involves software that is connected with monitoring devices throughout the entire vineyard. This technology enables optimum management for better-quality grapes, and also minimises the cost of vineyard management. This programme was developed with Cyprus research and innovation company, CyRIC.

The second programme is related to the development of yeast from local indigenous grape varieties. In collaboration with the Cyprus University of Technology, the winery has since developed eight different yeasts, three of which seem to be very promising. The advantage of indigenous yeast is having the ability to produce truly distinct wines. Having successfully completed the set-up, we are now in the pilot testing phase for both innovation programmes.

Innovating to excel
The present management of Makkas Winery has managed to achieve all of its goals under the most adverse conditions. At the time of starting out, the economic crisis had hit Cyprus and severely impacted its financial sector. And yet, based on official data from the country’s Ministry of Agriculture, in 2016 Makkas Winery ranked as the fourth most successful winery in the whole of Cyprus in terms of grape intake – a position it has since maintained.

Having consolidated our position in the local market, Makkas Winery is now focused on developing and promoting the exceptional characteristics of Cypriot wines, both at home and abroad. The unique Cypriot grape varieties such as Maratheftiko, Giannoudi, Xynisteri, Promara and Morocanella can make distinctive, high-quality wines, as they are not found elsewhere in the world.

Among the most popular of our wines are Makkas Red, Makkas Xynisteri, Makkas Rosé, Makkas Syrah, Makkas Maratheftiko and Makkas Lefkada. Two new sweet wines, Makkas Nama and Makkas Muscat, will be introduced this year. Made from sun-dried grapes, Makkas Nama is a traditional Cypriot variety of dessert wine with a high alcohol content of around 15 percent and a very characteristic taste. The goldish-brown colour of Nama depends on the age of the wine: the darker the colour, the more aged the drink is. Due to the uniqueness and quality of this legendary wine, there are great opportunities for exports in markets across the world.

Our long-term strategy is also linked with volume. In order to expand the productive capacity of Makkas Winery, a new winery has been designed in a unique plot in the middle of the vineyards, with a superb view from the visiting part of the winery. The design has some pioneering features: most notably, the winery will use gravity, instead of the traditional pumping method, to improve the quality of the wine we produce. This new plot will also allow for an increase in productivity, which in turn will help Makkas Winery to expand exports and minimise risk. Moreover, the new winery will give us the possibility to produce sparkling wines, which are gaining ground in terms of consumer preference.

Our innovative new winery involves a four-storey building; the first floor, which is going to be underground, is where the wines will be bottled and stored. Tanks will be located on the second floor, while collection will be carried out on the third floor, which will be separated into two sub-planes. Sorting will be carried out on one sub-plane, and from there the grapes will be transferred – using nothing but gravity – to the tanks on the second floor.

The fourth floor is designed as a destination for wine tasting, dining and cultural activities; there will also be a roof garden with outstanding views of Paphos in the front and a stunning mountainous landscape in the back.

The fourth floor and rooftop have been designed specifically with the aim of opening the winery up to the public, thereby providing the possibility for visitors to get to know the people and products behind Makkas Winery. This space will also give us the opportunity to organise events, including workshops and seminars, related to the fascinating process of making wine.

Visitors to the winery will even be given the chance to stay on site, as the new design includes rooms and hosting facilities. Offering accommodation will also enable us to welcome key partners and industry experts to the winery, which will help us foster great business relationships.

As Cyprus is a popular tourist destination, the innovative new winery is expected to attract more and more visitors each year, while also enabling us to increase sales and further improve the market position of Makkas Winery – both at home and abroad. Through the use of modern techniques, we are therefore able to shine the light on the ancient beauty that is Cypriot wine.

Arcview enabling investment to prosper in the cannabis industry

Posted on by Max Tomlin

The legal cannabis industry has taken the Americas by storm. As the high-value commodity is legalised state by state – it is now legal in 29 states throughout the US and federally legal for medical uses in Canada – it continues to smash records, with the market expanding at an astonishing rate. According to the Arcview Group, the estimated spending for legal cannabis in North America last year reached close to a mammoth $10bn, surging from $6.7bn in 2016. With cannabis set to become legal for recreational use in Canada later this year, and as more states in the US roll out their own legalisation, there is no sign of this rapid growth slowing any time soon.

Cannabis has been found to have a significant positive impact on the markets that have chosen to regulate and tax its consumption

World Finance spoke to Troy Dayton, CEO of the Arcview Group, a cannabis investment and market research company that has been making waves in the industry. He said: “We estimate that by 2021, spending will be $24.5bn, which is a compound annual growth rate of 28 percent.” Moreover, factoring in indirect effects of legal cannabis revenue, which include transactions with businesses in other industries, such as shipping, packaging and payroll processing, Arcview expects legalised cannabis to inject close to $40bn into the US economy by 2021, while also adding up to 414,000 jobs.

The regulation effect
From Arcview’s recent findings, it is clear that regulations play a crucial role in the rapidly growing market for legal cannabis in North America, particularly due to the complexity of the legal landscape. At present, the regulatory framework is a patchwork of differing laws and regulations that vary by state and even, in California, by city. “The structure of each has a significant effect on the viability of the industry,” Dayton explained. “Western states with a large number of cultivation licensees have seen the price of cannabis start high and then fall dramatically over the following several months as new supplies come online. Conversely, East Coast states such as Massachusetts have a limited number of licensees, and so a wholesale pound will go for four to five times the price as it would in Oregon. That doesn’t necessarily mean that it’s four or five times more profitable to be a cultivator in Massachusetts than Oregon, but it’s an example of the wide variances in market conditions created by regulations.”

In any case, cannabis has been found to have a significant positive impact on the markets that have chosen to regulate and tax its consumption. Indeed, Colorado’s cannabis tax revenue is triple that of alcohol – and is expected to reach nearly $150m by 2020. “The cannabis industry also creates jobs; there are now more people working in the cannabis industry than there are dental hygienists,” Dayton told World Finance. It is also interesting to note that in states that have legalised cannabis, access and use by teens has declined – a general trend that is also expected to play out in other states that legalise cannabis.

$10bn

Estimated amount spent on legal cannabis in the US in 2017

$6.7bn

Estimated amount spent on legal cannabis in the US in 2016

Brand appeal
Branded products in particular are one of the biggest investment opportunities in this nascent market. “If you think about the history of cannabis, there really have been no consumer brands – you just kind of had to take what your dealer provided, and the packaging was always a plastic baggie,” said Dayton. Now, however, there is a huge opportunity for cannabis cultivators and the manufacturers of cannabis-infused products to have a dialogue with consumers that they have never had before. “Cannabis consumers have the same wants and needs as any other category of consumer, because they come from all categories of consumers: young and old, male and female, black and white. So I think it’s interesting to watch that space as brands develop, and see which one becomes the proverbial Coca-Cola of cannabis.”

Like Coca-Cola for the soft drinks market, having a leading brand in the cannabis industry can help to maintain pricing power. “Despite the ability to assemble ingredients and deliver a product for far less in a knock-off brand, Coca-Cola is still able to charge more because of the brand’s reputation,” said Dayton. “At present, the price of cannabis is artificially inflated because of prohibition. But we know that as more supply comes online, prices will fall. The cultivators and manufacturers that survive this drop will be the ones that develop strong brands.”

Investment trends
As a great deal of work is currently being done in the field in terms of research and development (R&D), the speed of innovation in the field is considerably faster than in other agricultural industries. “There are some very interesting developments I’ve seen in cultivation and extraction technology,” Dayton noted. “The current margins in cannabis justify a lot of R&D efforts, and those sectors are moving very quickly with rapid innovation.”

In conjunction, ancillary products and services are also now emerging, developing and expanding at a fast rate. As such, investors are paying close attention to companies making offerings such as cultivation software and infrastructure development. In terms of the latter, infrastructure can be electronic or physical, which consumers use to interact with when learning about and purchasing cannabis online for delivery or within a dispensary. Other supplementary service providers that are currently surfacing include those in compliance, which help ensure retailers and cultivators meet government requirements, and others that handle the logistics of transporting and tracking truckloads of cannabis.

Aside from these, there is another area in particular that offers a plethora of opportunities: Canada. “The Canadian licensed producers [LPs] have a huge head start on developing global distribution infrastructure and supplying emerging markets in Europe and South America,” said Dayton. What’s more, the type of infrastructure developed there, in terms of the scope and scale of sprawling greenhouses and state-of-the-art facilities that require substantial investment, is readily available because Canadian cannabis operators are able to access Canadian public markets.

“Of course, anyone paying attention has seen the huge run-up in prices recently as investors clamouring for exposure to the industry have piled into Canadian cannabis stocks. While there’s been a pullback since early January, the sector is still up about 80 percent overall since October 2017,” Dayton explained. Although the Toronto Stock Exchange allows Canadian LPs, it is currently reluctant to allow US cannabis companies to list if they have operations in the US. The Canadian Securities Exchange, however, is more willing. “The number of cannabis companies listed in Canada will continue to increase until US exchanges allow ‘plant touching’ cannabis companies to list on a major stock exchange, which is unlikely so long as cannabis remains on Schedule I of the US Controlled Substances Act,” Dayton added.

He continued: “We think that a deep-rooted cannabis culture and an enormous consumer market makes it likely that the next big thing in cannabis will come out of California, and investors should be paying attention.” Effectively, the relatively open licensing system for obtaining a permit to cultivate cannabis or manufacture cannabis-infused products means rapid innovation in product development and branding. In this respect, Dayton explained, California has always been, and will remain, a trendsetter. He added: “In fact, the other states can be likened to pilot studies compared with the enormity of California.”

In good company
Despite the vast potential of the cannabis market, Dayton warns against overzealousness. “In any market where there is a lot of excitement and froth, investors would be wise to use caution, and cannabis is no exception. In particular, I see a lot of investors rushing into projects that may not be licensed, and so lean on regulatory experts and attorneys to understand the real risks. Ensuring that the entrepreneur isn’t selling you a rosy vision is important.” One way to mitigate risks, he advised, is to develop solid trust networks, through which players can interact with one another to access information and further build upon a peer network of other investors and operators.

This is precisely how Arcview fits into the landscape. “We first try to help investors make sense of the industry by publishing the standard for cannabis market research,” Dayton explained. “We curate the best investment deal flow in the industry for our investor members, and we provide a place for them to network with other high-net-worth cannabis investors and leading experts and entrepreneurs. Through this network, we can all share deal flow, information and strategic connections. We are also building an asset management business to place investors’ capital for them.”

As a consequence of the rapidly changing nature of the market, it is critical to stay abreast of the latest trends, which in turn makes the provision of the most up-to-date data absolutely essential. To this end, Arcview has partnered with Colorado-based firm BDS Analytics to produce reports, given that the latter has the most robust point-of-sale data in the space.

When asked about his outlook on the future of the industry, Dayton replied: “Everything is getting bigger, but at a slower pace than it would if this was an unfettered international market. So there will be lots of fits and starts along the way to maturation. The wholesale price of cannabis will fall, the value of brands will rise, and we will see consolidation of smaller providers and the accelerated roll-up of distressed providers who can’t compete.”

JAMPRO brightening investment prospects in Jamaica

Posted on by Max Tomlin

The Jamaican economy has come out of the global recession to achieve five consecutive years of growth. While it has been a period of fluctuation – from lows of 0.5 percent to highs of 1.4 percent – the economy shows strong signs of continued recovery. During this time, the government has worked hard to improve fiscal consolidation through a more stringent regulatory framework, which has reduced debt from 135.8 percent of GDP in 2013 to 102.1 percent during the 2017-18 financial year.

Action has also been taken to increase competitiveness on the island through key business reforms, which have made it easier to start a business, improved port efficiency and modernised tax payments. Next on the agenda is to revamp the processes for registering property, applying for construction permits and the enforcement of contracts. World Finance spoke with Diane Edwards, President of Jamaica Promotions Corporation (JAMPRO) – a government agency that promotes export and investment opportunities across the country – about some of the most noteworthy recent changes in the country.

How is Jamaica’s logistics sector currently developing?
Jamaica’s logistics sector has seen considerable investment over the past two years. With the divestment of the Kingston Container Terminal in 2016 to CMA CGM, the third-largest shipping line in the world, the Port of Kingston has had upgrades to the tune of approximately $400m. This includes the upgrade of the physical and technological infrastructure, the dredging of the harbour to facilitate post-Panamax vessels, and the overall redevelopment of the port berths.

Other initiatives will further cement Jamaica as a logistics-centred economy. These include the planned divestment of the Norman Manley International Airport, which will facilitate four million passengers per year – up from the current 1.7 million. With the movement of people also comes the movement of goods and services, and this initiative will play an integral part in the overall logistics capabilities. Future investment initiatives that will also impact the logistics sector include the Caymanas Economic Zone, which will be the first large-scale integrated economic zone in Jamaica.

What opportunities now exist for investments in the timeshare market?
The timeshare legislation was passed in 2014, while timeshare regulations came into existence in 2016. These developments present the opportunity for Jamaica to tap into a global industry that is currently valued at $57bn in direct economic output annually. With the concentration of investment in hotels being in Montego Bay, Ocho Rios and Negril, there are many opportunities for investment in other parishes that depart from the all-inclusive model. Instead they focus on ‘vacation ownership’: catering to heritage, ecological and other forms of non-traditional tourism, in addition to normal leisure travel.

Investors can also take advantage of available properties under the ‘shovel ready’ investment programme to construct mixed-use developments with residential components, or standalone developments, and benefit from a faster approval process than what they would normally obtain. Hotel developers also now have the option to introduce vacation membership clubs and vacation ownership as part of their offering, thus increasing the potential markets for their hotels.

What other sectors are viable for investment in Jamaica?
With an estimated revenue of approximately $400m in 2016, the IT-enabled services and business process outsourcing (BPO) sector is a high-performing segment of Jamaica’s services industries. It has enjoyed the highest employment growth rate of any sector in the past decade, and presently accounts for more than 26,000 jobs island-wide.

Jamaica is the leading contact centre location in the English-speaking Caribbean and has firmly established its reputation as a strong and highly competitive destination for BPO. Industry heavyweights such as Alorica, Teleperformance, Vistaprint, Hinduja Global Solutions and Sutherland Global Services continue to invest in Jamaica’s BPO sector.

Other areas that continue to expand in Jamaica are tourism, agribusiness and manufacturing. There are also significant investment opportunities in the areas of new, renewable and alternative energy sources. Jamaica’s renewable resources in wind, biomass, hydro and solar energy are an excellent way to minimise its dependence on imported fossil fuels and, in the long term, transition itself into becoming an independent energy producer. Against this backdrop, the government is now rolling out a new strategic plan for the continued development of Jamaica’s renewable energy. The country is also building its reputation in knowledge-based outsourcing areas such as finance, accounting and HR.

Is the Jamaica Stock Exchange a good option for investors?
The Jamaica Stock Exchange (JSE) is currently experiencing strong performance, with both the main market and junior market indices performing tremendously well. In 2017, returns averaged 50 percent and 43.9 percent on the main market listings and junior market listings respectively. The main index has grown in the past three years and is projected to continue its performance as the country’s economy stabilises and private capital flourishes.

As such, the performance of the domestic market has not gone unnoticed in the international market; Bloomberg recognised the JSE as the leading exchange in the world in 2015 following a 97 percent growth in the main index. As the indices grow, so does the wealth of stockholders. The market capitalisation of the exchange at the end of 2017 was valued at JMD 1trn ($7.8bn), with growth of over JMD 100bn ($788m) since the end of 2016. Coupled with a strengthening economy and a more buoyant currency, the purchasing power of the domestic market continues to grow stronger each year.

TiCad setting the standard for authenticity and functionality

Posted on by Max Tomlin

In a world increasingly dominated by new technologies and production lines, the desire for authenticity – for something genuine – continues to drive demand for handmade products. Whether it’s the impeccable design, the traceable manufacturing process or just the noticeable passion for the product, customers have always had an innate connection to items born of an individual’s expertise.

The artistry and high-quality materials adopted by TiCad have ensured great longevity, providing customers with the perfect combination of style and substance

Based in the town of Altenstadt, in the central German state of Hesse, TiCad lends special meaning to the term ‘handmade in Germany’. The company has produced premium golf trolleys since opening its doors in 1989 and, to this day, employs experienced experts to perform every step of the manufacturing process with care and precision.

Such dedication to authenticity and craftsmanship has made the classic TiCad Star and premium TiCad Liberty trolleys a permanent fixture on golf courses around the world. In fact, the artistry and high-quality materials adopted by TiCad have ensured great longevity, providing customers with the perfect combination of style and substance. What’s more, each TiCad trolley is unique, with customers able to customise everything from special bag holders and personalised engraving to the type of leather and thread on the handle.

It is this commitment to design and production that has seen TiCad become the first manufacturer of golf products to be inducted into the prestigious Meisterkreis Deutschland network, an organisation that seeks to showcase the outstanding achievements of German engineering to the wider world.

The art of the game
Over the years, TiCad has grown its portfolio to include five hand trolleys and four electric models. Whether electric or manual, each trolley benefits from broad-based expertise, skilled workmanship and an impeccable eye for detail. Every component passes through the hands of an expert, and is perfected through the company’s steadfast commitment to both the craft and the product.

At a time when many other manufacturers have looked to outsource the production of their components, TiCad has consistently extended its own value chain, making almost all of its own parts. During the manufacture of the trolley’s titanium wheels, for example, numerous steps are taken to form the classic three-spoke design in house. Crafting the rim, hub and spokes alone involves cutting, bending, pressing, milling, spindling, deburring, welding, blasting and polishing the titanium.

The TiCad leather shop, meanwhile, uses first-class hides from free-range southern German cattle to create high-quality tailored handles. Precision-crafted decorative seams put the perfect finishing touches on the trolley’s overall appearance, and customers can choose from a wide range of colourings to make the trolley their own. Further, by crafting each leather grip by hand, TiCad is able to accommodate any special requests into the design. The success of TiCad’s bespoke handles has even encouraged the company to expand its offering, with a number of new leather projects set to carry the brand’s unmistakable signature in the near future.

Unsurprisingly, the unparallelled quality of TiCad golf trolleys has earned plaudits from customers and industry commentators alike. The TiCad Star, for instance, has delighted generations of golfers as a timeless, elegant and functional trolley, made of lightweight – yet sturdy – titanium. Its ingenious design, which led fans to affectionately dub it ‘the paper clip’, is just as appealing today as it was when the trolley first entered the market in 1991.

Winning the German Industry Innovation Award the year it was launched, as well as an iF Design Award a year later, the TiCad Star has since made guest appearances at two prestigious museums: the Deutsches Museum in Munich and the Museu de Arte do Rio in Rio de Janeiro. But perhaps most impressively, the TiCad Star was officially recognised as a work of applied art by the Regional Court of Frankfurt in 2003 for “surpassing creative intellectual content”.

Perfect drive
With a sleek, clean-lined style and titanium frame, the TiCad Liberty embodies all the values TiCad holds dear. Its innovative button and twist-grip controls ensure automatic forward motion, while the handy joints at the drawbar and axle allow it to be set up and dismantled in seconds. The powerful motors, which are ultra-quiet and efficient, combine with high-performance lithium-ion batteries to keep the trolley running for at least 27 holes. And, for more extreme performance demands, TiCad has developed a powerful sports drive which, combined with the electromagnetic parking and downhill brake that come as standard, makes it easier to navigate hilly courses and difficult terrain.

When you buy a TiCad trolley, you are never buying ‘off the rack’: countless accessories turn playing a round of golf into a true experience and provide storage for everything from scorecards and umbrellas to smartphones and GPS devices. The top-of-the-line model even features a special power supply that will keep your smartphone battery from running down on the course. This is an especially useful feature for those making use of the company’s app to find the nearest golf course, track scores and store notes.

TiCad is widely recognised in the market for its inventive creations: in 2017, for example, the innovative TiCad flight battery was acknowledged under patent law. First launched in 2016, the flight battery doesn’t require vetting from international airlines, which often stipulate batteries above 100Wh must be approved prior to flight. The flight battery’s intelligent structure is based on two separate battery modules – each storing 92.9Wh of power – that are mechanically separated from each other.

Critically, the German Federal Office of Aviation has confirmed the patented TiCad flight battery is suitable to be carried on passenger aircraft – this is also noted in the manufacturer’s certificate that accompanies the battery. With a total power of almost 190Wh, the TiCad flight battery ensures there are no obstacles to an extended round of golf – even on vacation.

Down to a tee
TiCad understands that good design means more than just appealing looks, and believes the evolution from pure form development towards functionality is a key consideration for any manufacturer. With this in mind, every TiCad product is measured against three criteria: aesthetics, comfort and convenience.

As such, trolleys like the classic TiCad Star and TiCad Canto (launched in 2017) are based on the folding principle: opening and packing away in just a single smooth motion. The ingeniously simple folding technology is based on a plug-in principle known as the ‘fixfest connection’, and never fails to impress golfers by adding perfect functionality to the trolley’s refined look. Precision-crafted by hand, the fixfest connector eliminates the friction between frame parts and requires zero maintenance – not even a drop of oil. All these features allow TiCad trolleys – whether manual or electric – to be stowed effectively within seconds.

The TiCad approach to functional design has won many admirers. The company’s employees are experts in their field and, thanks to this know-how, are able to achieve design standards unparallelled by the latest manufacturing technology. The result is an authentic, high-quality and harmonious design that is appreciated the world over. With 15 awards and distinctions from prestigious international design competitions, it’s clear TiCad ranks among the experts of product design. The German outfit has consistently proven the benefits of authentic handmade products and, in a world often driven by quick and cheap production, has crafted stylish and functional classics in line with its claim to provide the perfect trolley.

CB Bank successfully adapting to meet the needs of a new generation

Posted on by Max Tomlin

Economic liberalisation came relatively late to Myanmar, but the country has been working hard to make up for its slow start. Following a military coup in 1962, the country was governed by an oppressive dictatorship and subsequently experienced the ignominy of being rated one of the least developed and most corrupt nations in the world. The election of 2011, however, marked a sea change for the people of Myanmar. When President Thein Sein’s government came to power that year, a number of major reforms were implemented, aimed at boosting economic growth.

Products and services need to be easily distinguished by quality, characteristics, attitudes and lifestyle and should offer some level of personalisation

The impact was immediate. Foreign investment grew by more than 6,000 percent in 2011, and the following year the Asian Development Bank began considering the country for development loans. Myanmar’s transition from economic isolation to a fully fledged participant in global affairs has continued under President Htin Kyaw, who became the country’s first democratically elected head of state in March 2016.

Following hot on the heels of the government’s own liberalisation efforts, private enterprise has played an important role in boosting Myanmar’s economic fortunes. The banking sector in particular, which suffered as much as any under military rule, has flourished. There are now 13 foreign banks based in the country, in addition to 24 domestic private sector institutions. Among the latter is CB Bank, which has been meeting the financial needs of Myanmar’s citizens since 1992. With more than 206 branches in the country and a growing ATM network, the bank has played a key role in improving financial inclusion. World Finance spoke with Ko Zay Yar Aung, Head of Cards and Merchant Services, and Ko Wai Phyo Aung, Head of Transaction Banking, at CB Bank about the rapid changes taking place in the industry and why digital banking is proving increasingly popular in Myanmar.

How important has the adoption of digital banking services been to Myanmar’s growing role within the global economy?
Change is happening at a rapid pace, and emerging markets are expected to grow quickly in the global economy. As Myanmar continues to develop, the adoption of digital banking services has become a catalyst for growth and prosperity. The passing of the Financial Institutions Law of Myanmar in January 2016 represented another significant step forward. It acts as the governing law for both domestic and foreign financial institutions.

How has CB Bank’s introduction of digital services helped with cash management in Myanmar?
Historically, cash has always been king in Myanmar, but cash management systems are a relatively recent introduction. Since its inception in 2004, CB Bank has been an early adopter of new cash management solutions, utilising its extensive knowledge of local markets and the relevant regulations. T24, the core banking system provided by Temenos of Switzerland, has enhanced connectivity by enabling bank branches to facilitate better services and improve the overall customer experience. Today, our bank’s cash management products include electronic or paper-based payments, receivables solutions, liquidity management solutions and electronic delivery channels to multinational corporations, corporate clients, SMEs, NGOs, embassies and financial institutions.

What role does technology play in CB Bank’s cash management services for its multinational clients?
We provide technological sophistication in straight-through processing and enterprise resource planning systems integration. With its new application of programming interface capabilities, the bank can now easily provide better digital services for its corporate clients. In order to ease the administrative burden of payment preparation and approval, CB Bank facilitates payment management through single file processing from its clients. The bank also provides bulk account opening for company payroll purposes.

Payment data confidentiality, integrity and security are the most important aspects, which is why the bank has introduced a virtual private network client service to its customers so authorised personnel can upload the payment file through a secure private connection tunnel.

In what ways has the introduction of more point-of-sale terminals and mobile banking solutions benefitted merchants and SMEs?
CB Bank began introducing ATMs in Myanmar in 2011, followed by accepting Visa, MasterCard and China UnionPay through its point-of-sale terminals in 2012. Myanmar is still a predominantly cash-based economy, therefore it presents difficulties for SMEs in the early stages of growth. Our goal is to reduce cash usage and facilitate more efficient merchant payment. By adopting new solutions, we can collect data on transaction rates, as well as saving and spending patterns. This data collection also leads to improved credit decisions and greater transparency.

To what extent is changing consumer behaviour, particularly among young digital natives, driving banks to adopt more digital services?
Digital banking is quickly becoming the method of choice for many citizens in Myanmar. The growth in technology has made mobile banking possible through SMS or mobile internet. However, digital natives currently require basic financial products to support their lifestyle. Banks need to design products and services that are tailored to their needs, simple to understand and user friendly. Products and services need to be easily distinguished by quality, characteristics, attitudes and lifestyle, and should offer some level of personalisation.

How important are CB Bank’s recent partnerships with tech firms like Uber and Grab?
Uber and Grab have turned Myanmar’s taxi industry on its head. Myanmar is leapfrogging into smartphones. The availability of mobile phones and the falling cost of data have resulted in a highly digital community. Further, development in mobile technology, the government’s increased focus on boosting financial inclusion and a vibrant entrepreneurial community have created a thriving digital finance ecosystem.

Until recently, financial inclusion initiatives have been almost entirely bank-led. Within the past two years, however, we have seen a big push towards digital financial inclusion. The convergence of banks, telecoms players and technology start-ups is paving the road for higher integration and innovation.

In what ways are CB Bank’s digital services helping drive financial inclusion in Myanmar?
CB Bank has launched the Agent Banking Service for the development of rural areas. Daily cash withdrawals can be made safely not only at CB Bank branches, but also with Easi Mobile agents. The system is designed to enhance financial inclusion, as banking agents are expected to act as delivery channels and to offer banking services in a cost-effective manner. Approximately 1,100 mobile agents are currently in operation nationwide.

Myanmar remains a cash-based society. How important is it that CB Bank continues to offer traditional services like ATMs and bank branches?
Banks are no longer just competing with other banks – they are also competing with customer self-reliance. To continue adding value and utility, banks have to become omnichannel. The banking industry will always respond to consumer demand, and today that means becoming digital while maintaining our traditional services. As of the 2017/18 financial year, we have more than 206 branches and 700 ATMs throughout Myanmar. Our branches can be found in every major region throughout the country, and our mobile banking agents are in many rural areas where there is no bank presence.

The latest addition to CB Bank’s products and services is currency exchange machines. These are available at selective branches and offer notes in US and Singapore dollars, euros, Thai baht and Malaysian ringgit. The demand for currency exchange has grown in recent years alongside rising numbers of international travellers. The introduction of exchange machines has also improved the efficiency of the bank’s operations by reducing the frequency of cash replenishment.

What measures has CB Bank put in place to ensure corporate social responsibility plays a key role in its products and services?
CB Bank has gone beyond simply writing a cheque, by volunteering, providing donations like water and food, and encouraging employees to donate by matching contributions. Disaster relief fund donation options are also available on our CB Mobile Banking application. We have a long-standing commitment to responding to communities in times of disaster – whether natural or man-made – humanitarian crises and civil strife. It’s one of the ways we strengthen economic and social progress as part of our approach to responsible growth. We help our clients and teammates by leveraging our resources to assist individuals as they navigate a difficult time, and we’re working with the KMA Foundation on the ground to help communities recover and rebuild.

What are some of CB Bank’s plans for the future?
The forthcoming years will continue to bring more changes and pose new challenges. We are improving the quality of our operations and growing our client base. In 2018, CB Bank is focusing on new ways to create a user-friendly and more engaging digital ecosystem for the mobile banking customer. Our aim is to improve functionality prior to login and to redesign home pages to generate greater engagement using icons, personalisation options and visuals, and to combine increased functionality with an improved user experience through better navigation and design.

CB Bank QR code will allow all the merchants to receive digital payments without the use of point-of-sale swiping machines. It will also allow the customers of any bank to use their smartphone app to make payments using their debit card, but the further success of this scheme will also depend upon people’s awareness of QR codes. Ultimately, the industry is shifting towards the digital and mobile banking era and so are we.

Leading Nigerian banking into the digital age

Posted on by Max Tomlin

Last year can be regarded as a significant year for innovation. During the year, the world witnessed the launch of a shapeshifting supercar, an iPhone without a home button and even Sophia, the social humanoid robot who is not just a media sensation, but is also the first robot to receive citizenship.

The banking sector also experienced its fair share of disruptive innovation. Poland’s Idea Bank unveiled the first bank branch on rails, allowing customers to bank in transit on train carriages. Meanwhile, Belgian’s KCB Bank used blockchain technology to develop a seamless car loan service that covers every possible customer need, from the moment they sign the order to the point they drive their car off the dealer’s lot. Furthermore, Russia-based Sberbank has leveraged digital assistants such as Siri to help users change their financial habits for the better, saving them time, money and effort.

As technology changes the way that banking works, it also offers banks an opportunity to create a thriving digital future

Essentially, the growing dynamism of financial services, combined with the rapid proliferation of fintech start-ups (both globally and within Africa), has forced banks to do things differently. As technology continues to forge fundamental changes in the way that banking works, it is also offering banks a perfect opportunity to create a thriving digital future. World Finance spoke to Segun Oloketuyi, Managing Director and CEO of Wema Bank, to discuss how the bank overcame the economic difficulties plaguing Nigeria and seized the chance to become an innovative leader in the country’s digital banking space.

Spying an opportunity
At the start of 2017, Wema Bank was facing several global and domestic challenges. Nigeria, its operating market, was in the midst of a recession, while simultaneously facing serious inflation. Not only this, but uncertainty surrounding oil prices continued to linger, and the problematic multiple forex regime remained in place, resulting in slowed local production and weakened spending. Banks across the country were forced to rethink their strategies for the year. Several bigger banks, for instance, trimmed private sector lending and focused on consolidating their positions by investing in government securities.

81%

Percentage of the Nigerian population using mobile phones

53%

Percentage of the Nigerian population using the internet

175,000

Number of ALAT customers in the first six months of its launch

Wema, however, spotted an opportunity. As Oloketuyi observed: “As we believe there are opportunities to grow our financial access points, we continue to emphasise our digital drive, which is a conscious and deliberate action.”

In a country where mobile ownership is fast rising, the digital banking model has huge potential for growth over the coming years. Roughly 81 percent of Nigerians are now mobile subscribers, while 53 percent are internet users, according to data from the Nigeria retailer Jumia. New opportunities have also arisen in Nigeria as a result of a scheme launched by the Central Bank of Nigeria, which oversaw the creation of a centralised biometric identification system for the banking industry. The system, instigated in 2014, was designed to cut through bureaucracy and reduce fraud by matching customers to their biometrics and providing them each with a bank verification number (BVN). It also paved the way for those without other forms of identification to access the banking system for the very first time.

Wema decided to pursue the digital opportunities on offer by putting together a team of young, vibrant and forward-thinking Nigerians to conceive a comprehensive digital banking solution. Crucially, the solution was crafted with the goal of moving beyond people’s basic financial needs and focusing instead on being well suited to a customer’s lifestyle.

Time is money
In May 2017, the bank launched ALAT, Nigeria’s first fully digital bank. The digital bank was designed with a clear concept of the core services that it would cover. For one, it allows Nigerians to open a fully functional account online, meaning the entire process can be carried out without the need to visit a branch in person.

“ALAT is Nigeria’s first fully digital bank that allows everything customers would do in a physical bank branch to be done from their personal digital devices,” said Oloketuyi. “Accounts can be opened either by using the bank’s app, which is available on the Google Play and App Stores, or on the web. Every Nigerian of banking age is expected to have a BVN; this is required to open the ALAT account.”

Another key characteristic is that, with ALAT, customers can open a fully functional account from their mobile phones in as little as five minutes, which is the fastest of any account-opening proposition marketed by any Nigerian bank. It requires just two basic pieces of information to get an ALAT account up and running: the customer’s phone number and a BVN. The customer’s BVN contains sufficient biometric data to enable ALAT to authenticate the identity of the account holder in less than a minute, thereby ensuring a seamless front-end account opening process.

All other documentation can be uploaded directly from a mobile device and verified by a back-end team, saving the customer time and money by ensuring the individual never has to visit a physical branch. Once an account has been successfully opened, the account holder can request a debit card at no cost, and can have that card delivered to a convenient address for free.

Another priority for Wema is to ensure that the bank offers 10 percent interest on savings. “With ALAT, we have been able to reduce cost-to-serve to the bare minimum, allowing us to offer as high as 10 percent interest to ALAT customers that commit to saving diligently. Not only does this give customers a value-added service, but it also instils loyalty,” Oloketuyi added.

Wema has also taken several key steps to enhance its services in a way that simplifies the banking experience in order to suit people’s everyday needs. For instance, it enables customers to purchase cinema and event tickets directly from the app, while it also allows them to receive notifications on the latest discounts and trends in their specific areas of interest.

The Wema brand
The attractiveness of the digital way of life led many Nigerians to switch to the Wema brand over the course of 2017. Indeed, in the first six months of its launch, ALAT attracted more than 175,000 customers and collected over NGN 1.1bn ($3.06m) in deposits. As such, the shift to digital banking is set to have tangible benefits for customers, for whom the convenience, simplicity and speed of services can translate into wealth-creation opportunities.

Wema has not slowed its pace of innovation since ALAT’s launch, and has since released two upgrades — ALAT 2.0 and ALAT 2.2 — in the space of six months, expanding its service offerings to incorporate feedback from existing customers and market trends alike. Beyond ALAT, the bank continues to offer several digital products and services tailored to the specific needs of its customers across all demographics. For instance, it pioneered the use of card control in Nigeria, an in-app tool that allows customers to lock their payment cards from a mobile device. It is also part of the group of banks to successfully deploy mCash; a mobile service that allows merchants to receive payments by dialling a simple code. In addition, the bank continues to enhance its online and mobile banking apps to ensure it offers a seamless service across all of its banking channels.

“We hope to grow our customer base to three million by 2020 by positioning ourselves as a forward-thinking brand that helps create wealth for all our stakeholders,” Oloketuyi said. However, Wema Bank hasn’t neglected its traditional banking roots: instead, it has employed a mixed strategy of optimising its digital channels and renovating its branches to improve ambience and aesthetic value. “Our message to customers is that we have everything they need to bank wherever they are, but if they ever have to come to a branch, we want them to feel welcomed,” Oloketuyi continued. “We want to be much more to our customers, so we are working hard to open up channels through which we can communicate with them, offer advice and present opportunities to them.”

Excellence, enterprise and efficiency join technological aptitude as three more pillars of Wema’s success, and across each parameter there is a constant effort to monitor customer feedback to ensure any necessary modifications are made in a timely manner.

“We will continue to leverage on technology and innovation to deliver tailor-made financial solutions for our customers,” Oloketuyi said. “Wema is committed to leading the industry in the development of cutting-edge financial solutions and making financial transactions easier for all our stakeholders. For ALAT, we will build on our past achievements and learn from our previous challenges to deliver a bank that is increasingly dynamic and forward-thinking.”

BCPG driving an energy revolution in Thailand

Posted on by Max Tomlin

In Thailand, blockchain technology is being harnessed in a brand new way: to revolutionise the energy market by shifting power production to a decentralised network of small-scale households.

Blockchain technology has received a huge amount of hype over the past few years, but it is only recently that it has started to be implemented in energy markets

BCPG Public Company is a renewable energy company based in Thailand. World Finance spoke to BCPG’s President and CEO, Bundit Sapianchai, about the company’s efforts to build a system that will enable households to buy and sell solar power to one another using microgrids.

New energy economy
Microgrids are a series of small-scale regional power grids that enable households with solar panels to become ‘pro-sumers’. This means they are able to both produce their own energy and consume it through the same peer-to-peer trading platform. This system, which is based around blockchain technology, helps to cut out the middleman and generate trust between consumers and producers in the network.

Sapianchai explained to World Finance: “We want to build a new energy economy. To do so, we started with something quite simple: rooftop solar energy. In Thailand, we have been bringing solar panels to individuals in both the residential and industrial sectors by ensuring the panels are low cost, while also providing low-carbon energy. Once a community is producing energy with solar panels, BCPG can apply its energy trading platform so that every person can trade their energy directly.”

The platform has been dubbed the ‘internet of energy’, owing to its ability to connect individuals in a trusted manner, thereby expanding the peer-to-peer concept to energy markets. “We provide the trading platform using blockchain technology to create a marketplace where individuals can trade their surplus energy.” Through this mechanism, energy is shared more efficiently, so that those households with a surplus at any one time can be connected to those who need it. The initiative will be the first time that microgrid peer-to-peer technology has been established in Thailand.

While BCPG is an international company operating in several countries across Asia, Thailand – where the company has its headquarters – also plays host to its first peer-to-peer solar project. The first community to get started with the technology is located in Bangkok, and is currently scheduled to start trading in the next three to five months. “Our peer-to-peer platform enables people to take control of their energy. People are able to choose what they would like to do with their energy – either they use it, or choose to sell it,” said Sapianchai. In broader terms, BCPG is shifting the energy market from a centralised model, through which consumers purchase their energy from a select few large-scale producers, to a decentralised model, where small-scale producers are empowered to harness the economic value of their own renewable energy production. In a sense, this democratises the energy market by giving more control to local people. “We give power back to the people, so that people have the power to have their own energy economy,” said Sapianchai.

Harnessing blockchain
Blockchain technology has received a huge amount of hype over the past few years, but it is only recently that it has started to be implemented in energy markets. Sapianchai explained: “Blockchain is an incorruptible digital ledger, which can be programmed not just for financial transactions, but for everything with value.” The peer-to-peer energy trading market is a perfect fit for the technology because it necessitates a high level of security, transparency and efficiency to function well. “What we have been offering to our customers is a peer-to-peer transaction, where you can cut out the middleman or intermediary, which ultimately brings them a lower cost for the transaction,” Sapianchai explained.

More specifically, blockchain provides an attractive basis to the trading system because its incorruptible nature ensures that no one can hack the platform. Furthermore, it acts to boost transparency because each buyer and seller knows the individual source of their energy. “This is what blockchain technology is all about – there are a lot of middlemen when we pay our electricity bills today. For instance, we are charged transaction fees from a bank or at the retailer’s shop. But with blockchain, you cut that all out,” Sapianchai continued.

Peer-to-peer potential
While BCPG has so far only kick-started operations on a small scale, the peer-to-peer trading technology has the potential to be taken much further. According to Sapianchai: “It is possible to use it at any scale – you can even scale it up to a national scale.” In Thailand, for the time being, pro-sumers can only buy and sell their energy to others connected to them through the same microgrid. In order for the platform to be scaled up to the country level, it must be possible to sell surplus energy to the government through the national grid. Looking ahead, this will necessitate collaboration between BCPG and the government: “In Thailand, our market has not been privatised like Europe and the US, so one of the first challenges is that we need to talk to the government,” Sapianchai explained.

This said, Sapianchai has already been invited to talk to government officials about the potential for upscaling the technology, and it seems they are seriously looking into it. “It would be a small change for the government, but it would lead the way for some big changes in the energy market,” Sapianchai said. He has little doubt that he will be able to work with the government, as it is a win-win scenario for both individuals and the wider economy. While small-scale producers will be able to generate extra revenue, the larger system will gain a new source of environmentally friendly energy. Sapianchai observed: “From a bigger picture perspective, the government will no longer have to build huge power plants. Instead, they just need to connect individual roofs, which will become the power generation for the country. For me, it’s a simple decision that it is good for the country, and it will work to reduce our energy costs in Thailand.”

From an international perspective, the peer-to-peer solar trading concept is quickly gaining ground as a potential way to reduce the harmful pollution generated through traditional methods of energy production. As such, environmental pressures are helping to accelerate efforts to trial and expand the technology. While green energy is not a new trend, the task of combining renewable and traditional energy for consumption has often faced challenges in practice. “Global warming is real and happening, and the whole world is looking for a low-carbon solution. At the World Economic Forum in Davos this year, a lot of people were talking about this – they would like to see everybody being a part of a movement to not only produce greener energy, but also consume it,” Sapianchai said.

Wholesale to retail
Founded in 2015, BCPG started its operations with a wholesale business model, meaning it focused on producing energy and then selling it onto the grid. At present, the company is operating several green power plants throughout Thailand, as well as in other Asian countries. In the Thai market, the company owns 200MW of solar energy production capacity, while it has part-ownership of a capacity of 200MW of renewable production in Japan.

The company produces wind energy in the Philippines, and in Indonesia it produces geothermal energy. “Our business started in wholesale – I would call that chapter one. Now we are moving towards chapter two – the retail market,” explained Sapianchai. “As a publicly listed company, we aim to keep growing. Our biggest priority is switching from wholesale to retail, but it will take time to develop the retail market. Our other priority is to expand our wholesale portfolio.” From the wholesale angle, the company is actively looking for mergers and acquisitions opportunities throughout South-East Asia.

Looking ahead to the next chapter, a move into the retail space will be aided by the added value of the peer-to-peer trading platform, which is opening up an attractive new avenue for retail customers. While the project is initially being trialled on a smaller scale in Thailand, Sapianchai has high hopes that the peer-to-peer concept will be rolled out further afield. After all, once the software is in place, it can be upscaled without limit.

Challenges and opportunities in Latin America

Posted on by Max Tomlin

Latin American investors are facing unusual challenges in 2018. As the months go on, they will need to find quality assets in an environment where central banks have repeatedly slashed interest rates to spur economic activity. Furthermore, they will also have to navigate a dynamic political landscape, with general elections already held in Chile at the end of 2017, followed by Colombia, Mexico and Brazil during 2018.

The main focus for the region is Brazil. At the beginning of 2018, interest rates had reached a historic low of 6.75 percent (see Fig 1) and, according to the main macroeconomic research firms, may move even lower throughout the year. Against this backdrop, high-net-worth individuals, who used to benefit from double-digit returns provided by traditional fixed-income instruments, now need to explore a new set of asset classes.

Back in fashion 
After years of fixed-income products dominating the Brazilian landscape, investors are starting to consider assets that were historically less favoured, such as publicly listed equities, private equity funds, credit products, real estate and hedge funds. With rates likely to stay low for a while and capital market activity continuing apace, we expect strong demand for these new asset classes in 2018. Activity in both equity and debt capital markets is also likely to remain high. Moreover, given potential changes to tax treatment for individuals, it is likely that there will be increased interest in investing into private pension funds.

In addition, investments in markets outside Brazil are likely to become a more attractive diversification strategy, driven partly by a reduced interest rate gap. Assets denominated in other currencies will be more attractive as natural economic barriers come down, and high-net-worth clients become more aware of the need to diversify their investments geographically.

Chile represents another interesting market, in which the unveiling of the next government’s agenda will create fresh opportunities for investors. In addition to political changes, the Central Bank of Chile has driven interest rates to their lowest level since late 2010, sparking a renewed appetite for riskier assets.

Wealth managers will differentiate themselves through their ability to provide solutions for clients seeking for clients seeking to diversify their investments across asset classes

After several years of lacklustre economic performance, 2017 was a strong year for the Chilean investment environment, with equity markets reaching a high point. Recent equity capital markets activity has led to an increase in the number of companies listed on the local stock exchange, which has created opportunities to generate alpha through active stock selection. We expect companies with a stronger local footprint to draw more attention, with investors favouring small and medium-sized listed companies over larger counterparts.

Local alternative investments will also create new and interesting ways of investing in Chilean markets. One example is the real estate sector, which is recovering after the recent downturn. Credit is another strategy that is picking up speed through direct lending and structured products.

Close attention
The Colombian economy is still recovering from soft commodity prices and the impact of weak demand from Brazil. Inflation is finally falling, providing the opportunity for a looser interest rate policy. As in other countries in the region, Colombia’s central bank is finalising a cycle of interest rate cuts, which will push rates to levels comparable with those of late 2015. General elections will be held in May this year, against this backdrop of economic recovery.

Investment opportunities will move from interest rate bets into the domain of traditional stock picking and more sophisticated vehicles, such as real estate investment trusts. With respect to the latter, potential regulatory changes could lead to additional interest from non-Colombian investors.

Alongside investment allocation, as a result of recent reforms, high-net-worth clients will pay more attention to how best to rationalise their taxes, while continuing to diversify across asset classes and geographies.

In Argentina, economic improvement continues, but the challenge for Argentinian capital markets is to create local assets. Another important source of good news has been the ambitious government-sponsored reform agenda. Recent changes to tax and pension rules, combined with the overhaul of capital markets regulation, has paved the way for traditional asset classes denominated in the local currency. Recent economic reform aimed at reducing inflation and interest rates, together with Brazil’s recovery, is expected to stimulate local economic growth. Fixed rate bonds (both sovereign and provincial) and equities are the best ways to invest in Argentina’s turnaround, which we expect to evolve further in 2018.

The road ahead
In addition to the challenges derived from the onset of a new economic era, in recent years governments in the region have created new regulatory programmes for capital invested abroad by residents. This has raised the bar in terms of the quality of service and investment for a relevant portion of Latin American wealth.

The coming year has the potential to offer myriad investment opportunities in Latin America. The best wealth managers in the region will not only differentiate themselves through their quality of service, but also through their ability to provide comprehensive solutions for clients seeking to diversify their investments across asset classes.

As reformist agendas are favoured by governments throughout the region, it is crucial to understand regulatory changes. Setting up an efficient investment structure will also play an increasingly important role in generating long-term results. Ultimately, being a local player in the key Latin American economies with strong capabilities is a significant competitive advantage when advising clients in the year ahead.

The QE reversal

Posted on by Max Tomlin

Quantitative easing (QE), also known as ‘unconventional monetary policy’, started off as a far-reaching experiment prompted by exceptional circumstances and used only as a last resort. But the unconventional has now become conventional, and large-scale asset-purchasing programmes have landed the Federal Reserve, the European Central Bank (ECB), the Bank of England and the Bank of Japan with enormous balance sheets.

In the face of an impeding global bout of ‘QE in reverse’, economists are stressing the fact that this is by and large new territory

Former Chair of the Federal Reserve Janet Yellen said that she hoped the reversal of QE would be as “dull as watching paint dry”. However, given the scale of central bank assets set to be shed, this is unlikely to be the case. When the banking sector began to cave in September 2008, the Fed’s balance sheet stood at just $905bn – six percent of GDP. It is now being wound down from a peak of $4.5trn, which represents around a quarter of US GDP (see Fig 1). Together, the ECB, Bank of England, Bank of Japan and the Fed have amassed balance sheets of over $14trn.

In the face of an impeding global bout of ‘QE in reverse’, economists are stressing the fact that this is by and large new territory. In the words of Christopher Martin of the Institute for Policy Research, there are very real “dark areas” in our knowledge of the process in reverse.

As we look ahead to a post-crisis era, it is unclear what role balance sheet alterations will play in the mix of central bank policy tools. Central bankers have to establish how quickly balance sheets should be unwound, as well as whether they plan to go back to the same monetary policy framework from before the crisis. This is wrapped up in the question of whether QE will be remembered as a one-off affair, or whether it will be employed in the near future as ammunition against recession. Policymakers are generally in agreement that a ‘new normal’ has to be found, but are far more divided on what it should look like.

Flicking the switch
Back in 2014, in what became known as the ‘temper tantrum’, the first hint of balance sheet normalisation famously rattled the markets when the Fed stated that it intended to reduce the size of its asset purchases. The announcement saw bond markets plummet and tens of billions of dollars wiped off stock markets worldwide. The instability also hit mortgage rates and filtered through to commodity markets, knocking down the price of gold by several percentage points. This underscores one of the key dark areas regarding QE: the role of forward guidance. When it comes to the policy in reverse, the interplay between markets and central bankers’ statements about the future is still not fully understood. “Some statements have a weak impact and some have a strong impact and we don’t really know why,” said Martin. But since the temper tantrum, central banks have been wary of sudden policy changes, taking a more incremental approach.

The decision was made to flick the switch on QE at the Fed’s meeting in September of last year, and it has since been reducing the size of its balance sheet at a gradually accelerating pace

Having been the first to take the plunge into unconventional policy in the wake of the banking crisis, the Federal Reserve has become the first to begin the process of turning it into reverse. The decision was made to flick the switch on QE at the Fed’s meeting in September of last year, and it has since been reducing the size of its balance sheet at a gradually accelerating pace.

The Fed’s chosen strategy is to unwind balance sheets not by selling bonds, but by progressively stopping reinvestments when its assets mature. This is called a cap approach, and requires the Fed to commit to an upper limit on the amount of investments that are allowed to mature without reinvestment each month. The official plan is to gradually increase the pace, with the initial cap of $10bn set to increase by $10bn each quarter until it reaches $50bn, which is scheduled to take place in October 2018. Since the appointment of Jerome Powell as the new chair of the institution, this initial plan is expected to continue without any considerable changes.

Starting to unwind
No other central bank has begun actively downsizing its balance sheets, though a string of central banks are poised to follow in the Fed’s footsteps. The Bank of England brought its quantitative easing programme to a standstill last year, capping asset purchases at £435bn ($601bn). It has since indicated that the unwinding will begin when interest rates have returned to around two percent. This leaves just the Bank of Japan and the ECB still actively buying up new assets, although the ECB is already slowing its pace of expansion. The ECB has committed to a gradual tapering of the size of stimulus, and has halved its asset purchases from €60bn ($74bn) per month to €30bn ($37bn) (see Fig 2). Even the Bank of Japan, which has committed to QE like no other central bank, has been gradually reducing the size of its asset purchases.

As central banks move closer to reversing QE, they will be watching the US for strategy cues. But while all eyes are on the Fed, its approach cannot be described as much more than ‘wait and see’. A statement from the Fed on its principles for policy normalisation noted that it would be prepared to reduce the speed of balance sheet reduction, or even go back to balance sheet expansion if the economic outlook were to warrant it. The message is that the plan can be sped up, slowed down or even reversed if necessary. “It looks like a very unscientific method”, said Grégory Claeys of Brussels-based economic think-tank Bruegel. “But given the uncertainty that surrounds it, it is important to do some trial and error. It was already the case when QE was created that there was a lot of trial and error. And for this reason, I expect that the speed will be very slow at first because they will have to test the effects on the economy. First you must test the policy, and then you increase the speed or you reduce the speed.”

Taking it easy
The Fed’s unwinding policy started slow, but if all goes according to schedule, it will pick up substantially in the months ahead. As its pace increases and a synchronised global wind-down of balance sheets approaches, many are anxious that cutting off the flow of new money to the bond market will trigger considerable market instability as investors react to the absence of central banks as a buyer of assets.

The Fed’s chosen strategy is to unwind balance sheets not by selling bonds, but by progressively stopping reinvestments when
its assets mature

In addition, there is the chance of a sharp fall in bond prices. It is widely acknowledged that bond values have been pushed up by QE as a stimulus, implying that the reverse would bring them back down again. The associated monetary tightening, if it occurs too quickly, could dampen the green shoots of economic recovery. This said, estimates vary wildly for the extent to which the policy pushed up bond values, although empirical studies imply that the impact was more muted than expected. For instance, a group of Fed economists estimated that the impact of all the stimulus programmes on benchmark 10-year US Treasury yields was just one percent.

There is also no guarantee that the effect will be symmetrical on the way down. “My view is that [the effect] will be quite asymmetric,” said Claeys. “When you do QE, you do it in a period of significant uncertainty, and it has a positive effect on growth… You could say that if you unwind QE, the opposite will be true. However, the situation is very different because risk aversion from investors is very different.”

Another concern is that the fiscal implications of higher bond yields could throw up fiscal policy issues. According to Martin: “Take the UK case, for example – the Bank of England has bought huge amounts of government bonds. If the Bank of England starts selling off bonds, then the Treasury would be very nervous about that.” This also gives reason for caution, but again it is unclear whether the effect on yields will be deep enough to trigger any economic trouble.

According to Ricardo Reis, Professor of Economics at the London School of Economics, the biggest danger to come with a rapid decrease in balance sheet size “is to overshoot on the size of the balance sheet, and return to a world where liquidity was scarce, a significant gap emerged between interbank rates and the interest on reserves… The central bank would have an inconsistent set of tools on inflation control”. But despite these concerns, the first stages of balance sheet normalisation from the Fed have gone down with relatively little drama. As of March 2017, total assets were the lowest they’ve been since September 2014 (see Fig 3).

The old normal
Aside from the speed at which balance sheets should be unwound, Reis argues that “the more important discussion is on what the new normal should be in terms of the size of the central bank’s balance sheet”. Discussions surrounding QE have generally assumed that the end of the crisis would see a return to the ‘old normal’. This approach would see a return to a pre-crisis monetary policy framework in which balance sheets were far leaner. However, there is a question over whether attempting such a return is the right choice.

The official plan for normalisation, as communicated by the Fed in 2011, is to return “both short-term interest rates and the Federal Reserve’s securities holdings to a more normal level”. However, in June 2017, the Fed announced that its anticipated plan would involve “reducing the quantity of reserve balances over time to a level appreciably below that seen in recent years, but larger than before the financial crisis”. As such, details regarding the new normal for the Fed’s balance sheet remain up in the air, and the future interest rate framework is yet to be set in stone.

“There used to be a consensus of going back to the pre-2007 world with close to zero excess reserves and a very small balance sheet,” said Reis. However, he believes that this consensus could be shifting towards the idea that there should be a ‘new conventional’ central bank, in which balance sheets can be held permanently higher in order to guard financial stability.

He told World Finance: “The view… that the new normal should instead be a balance sheet large enough to keep the demand for reserves satiated and the interest on reserves (or on deposits at the central bank) the main policy tool has, in my view, gained much traction and is becoming the new consensus. I think it would be a bad idea to return to the pre-crisis level, but it is a good idea to shrink from the current levels. My ideal would have, for the Fed, a level of excess reserves around $500bn to $700bn, enough to satiate the demand for liquidity.”

Lean sheets
But there are questions over whether central banks will be willing to deviate substantially from the initial plan of returning to the pre-crisis framework. Some commentators warn of the dangers of excess cash in the system, arguing it could give rise to dangerously high inflation once bank lending starts to pick up. In this case, it would constitute an unnecessary stimulus, meaning a return to a pre-crisis policy framework should be seen as a priority. According to Claeys: “Central banks are generally very conservative, so it looks like they will head back towards leaner balance sheets.”

The fact that QE is tried and tested is likely to mean that there is less reluctance to fall back on it in times of economic trouble

One issue weighing on central bankers’ minds is that of room for manoeuvre in the future. A bloated balance sheet could make QE less viable if a recession were to hit at a later date. This is particularly relevant in Europe, where the ECB has committed to an upper limit of 30 percent for bond issuances in order to distance itself from accusations of monetary financing.

QE, or not QE
This leads to the broader question relating to the new normal, which is whether QE is here to stay as a policy tool. While QE was originally planned as a one-off measure, central bankers may be tempted to keep it as part of their monetary policy arsenal.

Whether this situation comes to light depends on the long-term neutral interest rate, the rate at which the economy can run at full capacity. This in turn depends on whether inflation picks up enough to enable central banks to shift their rates away from the lower bound. If the neutral rate remains low, then the primary policy tool of interest rates would provide little protection against future recessions.

According to Claeys, historical standards would imply that interest rates need to be cut by somewhere between 350 and 500 base points to give enough stimulus for the economy during a normal recession. This means that the neutral rate would have to reach a minimum of 3.5 percent in order to safeguard enough room for manoeuvre in the case of a recession.

At present, the historically low rates of interest across advanced economies are prompting arguments that the neutral rate may remain low for some time. “Defining the new normal today is difficult. At the moment, we still bear the scars from the Great Recession and also from the policy mistakes made here in Europe, so it is difficult to know if we are in a new normal where growth and interest rates are lower, and we need to use more… QE, or if we are just in a long aftermath of the Great Recession and the sovereign debt crisis,” said Claeys.

The fact that QE is tried and tested is likely to mean that there is less reluctance to fall back on it in times of economic trouble. According to Reis: “I think that QE should be a tool that central banks use with some frequency in the future. It has proven to be effective at affecting financial markets and at providing signals about the future path of interest rates while having modest, if any, additional effects on actual inflation.” In any case, the big test of the coming months will be to redefine what is conventional for the
central banks of the future.

The clash between KYC and cryptocurrencies

Posted on by Max Tomlin

Across every media platform and at many a social function, the topic of conversation these days almost inevitably leads to cryptocurrencies, blockchain, bitcoin and an ever-expanding swathe of its rival currencies. We can’t escape it, and for good reason: for here is an exciting new investment vehicle, an entirely different way of trading goods and services, and, essentially, a way to circumvent the financial institutions that currently make the world go round.

KYC demands that banks hold up-to-date identification records for every one of their customers, while also maintaining a risk profile for both the client and their relevant country

But, as with any new technology – particularly one as transformative as cryptocurrencies – there is a lot of confusion and scaremongering going on. Much of this negativity stems from security concerns and potential risks, which have been snowballed by the slightly mysterious nature of digital currencies. The matter of anonymity is of particular concern with regards to banking regulations, specifically ‘know your customer’ (KYC) and anti-money laundering (AML) regulations. But as industry experts explain, it needn’t be. There is much talk that KYC will be the death of bitcoin, its counterparts and their volatile values (see Fig 1), but the two realms can synergise with one another in a transparent, traceable fashion that meets with all fiscal rules required today.

Mistaken identity
Since entering the mainstream, digital currencies have come under a great deal of scrutiny – their decentralised and purported clandestine nature being strongly associated with criminal activity and suspicious levels of secrecy. Opposition has most notably come from governmental factions around the globe, the most drastic example being China, which earlier on this year moved to ban cryptocurrencies altogether. Such actions are undoubtedly linked to a fear of losing control, given that currencies work independently from central banks and are theoretically immune to political interference.

With regular currencies, third-party interactions enable regulators to monitor transactions in order to curtail fraudulent activities, money laundering, corruption and the financing of terrorism. As such, banks are liable for facilitating transactions that are found to be illegal, for which they may pay penalties to the tune of hundreds of millions. Such was the case for a whopping £163m ($226m) fine issued by the UK Financial Conduct Authority to Deutsche Bank for transferring $10bn worth of funds with unknown origins between 2012 and 2015.

Since the global financial crisis in particular, banking regulations have unsurprisingly become more stringent. As explained by Nina Kerkez, an expert in KYC compliance: “The financial crisis and terrorism financing have led to [the] introduction of numerous regulations – Dodd-Frank, FATCA, [the EU Fourth] Money Laundering Directive and many others. Regulators are certainly applying more pressure, not only on onboarding processes, but also on monitoring and screening of transactions, and most importantly on achieving full transparency and auditability in terms of what truly goes on within banks.”

This is certainly the case with KYC, which demands that banks hold up-to-date identification records for every one of their customers, while also maintaining a risk profile for both the client and their relevant country. “Knowing whom you are doing business with is critical, yet discovering this information can often be a challenge,” Kerkez told World Finance. “KYC is truly about unpacking risk.”

Amid this increasingly rigorous environment, many of the security concerns surrounding cryptocurrencies are founded upon the premise that they are anonymous. But, as explained by Chris Housser, co-founder of securities token platform Polymath, this isn’t actually the case: “Blockchain addresses are pseudonymous, and it’s very easy to track the movement of assets from one address to another.”

Third parties
Mounting pressure on digital currencies is also due to various companies simply not complying with existing regulations. In turn, numerous financial institutions, including JPMorgan Chase, Bank of America and Citigroup, have banned their correspondent banking clients from dealing with cryptocurrency-related transactions in order to avoid legal responsibility. Fortunately, however, this unfamiliar landscape has resulted in the emergence of a string of companies that apply KYC and AML regulations to cryptocurrencies, thereby acting as a bridge between the two spheres.

It is clear that digital currencies do not just host opportunities for those trading in them, they also offer massive potential for numerous industries

To this end, Polymath recently partnered with IdentityMind, an anti-fraud services platform for e-commerce, in a bid to offer cryptocurrency traders peace of mind with regards to compliance. “IdentityMind is one option to help issuers verify [the] residency of potential investors and to screen them against any sanctioned or other prohibited lists,” said Housser. With its patented eDNA technology and integrated KYC procedures, anti-fraud systems, transaction monitoring and sanctions screening, IdentityMind is able to authenticate the payment reputation of digital users, while also verifying names, addresses, dates of birth and social security numbers, as well as mobile phone and email locations. The company also offers KYC plug-in software, which contains the logic needed to collect KYC details for existing and potential clients.

Such solutions are vital in ensuring that regulations continue to be met – even with novel ways of conducting transactions. “The reason that financial markets can function properly is due to the regulations that prevent participants from acting as obvious bad actors,” said Sebastian Schepis, Chief Information Officer of Blockchain Foundry and founder of cryptocurrency Syscoin. “No financial market ever achieves maturity without a set of rules enforced on all participants that provides at least a minimum level of assurance that a counterparty won’t steal your funds or perform shady tricks while you’re trying to engage in honest business. There is nowhere on Earth where you can buy securities or deposit or withdraw fiat without some level of assurance that you aren’t » a criminal or terrorist. Why should those protections be absent in the crypto-space? All that does is enable bad actors and discourage most participants from investing.”

Schepis is right, of course. Despite the misconceptions, digital currencies can and will be regulated. Kerkez agreed: “Cryptocurrencies are still an unknown beast in the industry when it comes to KYC. At present, there is a lack of regulation. However, my view is that cryptocurrencies are here to stay, and so the financial industry simply needs to find ways to monitor and control the behaviours and transactions of these systems.”

Thanks to the work of some, this process is already underway. Blockchain Foundry, for instance, navigates through regulatory waters and completes notarised identities on the blockchain by providing ‘web of trust’ functionality for aliases. “This allows you to register an alias, which is signed by some other third party entrusted to perform a background check on you. This lets participants know that some alias identity was properly vetted before it was created by simply checking whether that alias was properly signed by the verifying party,” Schepis told World Finance.

Unblocking potential
Amid all the talk about cryptocurrencies working independently from supervisory frameworks, at present, few seem to mention that digital currencies actually offer numerous regulatory benefits. As Schepis explained: “Cryptocurrencies provide accessible, trusted and verifiable audit trails, which makes it very hard to hide illegal transactions. For example, Enron-style scandals, whereby some entity is cooking books to hide losses, simply aren’t possible when a cryptocurrency acts as the ledger for these transactions and blockchain participants are clearly identified and vetted using web of trust mechanisms.”

When considering cryptocurrencies in this light, it soon becomes clear that digital currencies do not just host opportunities for those trading in them – they also offer massive potential for numerous industries. As well as the financial sector, the remittance, logistics and supply chain industries are but a few examples of areas that could deeply benefit from both the transparency and efficiencies offered by blockchain technology. “These are all industries where having transparent audit trails and known and vetted participants present a great advantage over existing technologies that are hard to audit, and difficult to deploy and maintain,” Schepis added.
Yes, challenges remain at present, particularly from a regulatory point of view. As noted by Kerkez: “While still fairly new, we must understand the concept of crypto better – and soon – in order to be able to protect our financial systems and prevent illicit money movements.” Despite the inevitable hiccups and roadbumps, however, one thing becomes clear when speaking with industry insiders – cryptocurrencies are not going anywhere any time soon.

As Housser reflects: “I disagree that KYC/AML regulations will be the death of cryptocurrencies… I think existing cryptocurrencies will remain, and additional regulations will allow for more opportunities to flourish in the blockchain space.”

There is a whole new world of opportunities afforded by digital currencies. And with greater understanding, more and more advantages of the technology will certainly emerge. Members of every industry, meanwhile, will continue to explore the space, finding new and amazing ways in which they can utilise cryptocurrencies. In doing so, they will not only develop their systems to unlock new possibilities in ways we can’t even fathom right now, but they will also satisfy regulators to a degree that might not have even been possible without the use of blockchain technology in the first place.