27th January 2018 – Although this was a Foreign Exchange conference, there were two central themes discussed – blockchain technology and, you guessed it, cryptocurrencies.
The conference gave the industry a chance to discuss blockchain technology from a fresh angle, covering a variety of topics such as:
Among the fascinating speakers and panel discussions about the topic, the conversation kept coming back to the implications for the broker industry. Of all the financial services, it’s these organisations that are best-placed to capitalise on the masses betting their cash on cryptocurrencies alongside traditional fiat based CFDs.
LAB Group provides LABform to over 25 of these FX brokers, most of whom are Australian Financial Services Licensees. From a customer acquisition perspective, it is crucial that we understand where FX industry is heading. The sector is at the cutting edge of innovation and we need to evolve with it.
Here are my thoughts on how LAB Group can service this exciting and fast-moving industry.
Initial Coin Offerings
ICOs are digital assets created and sold to subscribers, commonly built on Ethereum (known as ERC-20 Tokens). As previously mentioned, Initial Coin Offerings (ICOs) are being used by developers to fund their new ideas.
It works like this – a startup builds technology underpinned by distributed ledger technology (DLT). It creates tokens to eventually use as currency on their platform. First they sell these tokens to the market, and with the funds raised they continue to build their technology.
This funding method has only been available to startups since the surge in popularity of cryptocurrencies and ICOs. Now, instead of going through the arduous process of creating a 30-page pitch deck, facing 10 VCs, and be subject to a six month due diligence process, you can write a 12-page white paper and raise $30M. Thanks to your mate down the pub who fancies a punt on cryptos, it’s happy days for founders able to write smart contracts on Ethereum!
Of course, there could be consequences to the ease of this type of funding. I spoke to a US Attorney who advises on ICOs, and he gave a sobering account of the questionable use of some of the tokens on offer. The subscriber receiving the token when, or if, the business launches may not be able to use it. Or, if the business launches but it’s not successful, the token’s utility becomes worthless. It’s like buying and selling fuel for a car that might not have an engine or didn’t actually exist in the first place. Like for an Initial Public Offering (IPO), buyers should do their research and homework on the utility of the coin to ensure they understand the context of its use to understand its potential future value.
In these times of fast technology builds, it becomes more critical than ever to go through quick, but accurate, Know Your Customer (KYC) and due dilligence procedures, especially for people running ICOs. I talked to someone who recently went to open a bank account for fiat deposits only to be turned down; the subscriber information for the source of funds only contained email addresses and nicknames. It took months to go back and gather the required KYC and ID information.
The term for converting your fiat currency into cryptocurrency is ‘on-ramping’ (and ‘off-ramping’ when it’s the opposite). Currently, these exchanges are attracting staggering numbers of sign-ups; I have heard numbers of more than 100,000 people per day.
Once you’re out of the world of fiat and using cryptocurrency, you can buy and sell coins directly or convert between coins. An exchange is only required again once you decide to off-ramp back to fiat.
In Australia, exchanges must be registered with AUSTRAC, making them subject to the AML/CTF compliance systems and procedures. Governing bodies and regulators are expected to follow suit in other jurisdictions if they haven’t already.
At 100,000 sign-ups a day an exchange has no hope of providing reliable customer service, and this is where brokers have an opportunity. They have the existing infrastructure and resources to manage the influx, and, as licensed entities, they should have robust on-boarding procedures.
Brokers also have the chance to capitalise on the leads from the Bitcoin hype by converting them into customers for other products and services.
Interestingly, 40% of the global adult population still has no bank account, but smartphone usage is set to hit almost 3 billion by 2020. If these numbers continue, there could be a future where bank accounts are no longer needed, where people can transact in cryptocurrencies without an intermediary. Anyone getting their first smartphone in 2020 could bypass the banks, simply because they no longer need an account. Predictions like these mean a potential decline for the banking industry, or a lack of take up in emerging markets.
One of the things I enjoyed most about the conference was the technical element underlined with practical use, and it was instructive to hear from the blockchain coders themselves.
Last year, I did a course with our developers and learnt how to write Smart Contracts in Ethereum, transact on the blockchain, and to create a DApp (distributed application). I took the course to fully understand the technology at a detailed level, and comprehend its place in the arsenal of tools available to engineers. Deep understanding is particularly important when planning product development roadmaps.
Without knowledge of the technology, the popularity of ICOs to raise funds could lead to organisations shoehorning in DLT when it may not be the best tool for the job. We could see a token use of DLT (no pun intended) as justification for an ICO.
At LAB Group, we’re lucky to have implemented LABform across many financial services asset classes and sectors. It has given us a refreshing insight into an industry that all starts with customer acquisition.
We make it our priority to understand the customer life-cycle beyond acquisition, including the systems required to orchestrate the overall service. We’re excited about publishing our partners page, promoting LABform’s connectivity into core systems across various sectors (see http://www.labgroup.com.au/integration-partners/). LAB Group customers will inherit the benefits of our insights as we provide an overlap of solutions between financial services sectors.
At its core, standardisation benefits everyone in financial services. Integration adaptors become reusable, streamlining the engagement process for all sectors. Without standardisation, processes become unwieldy and uneconomical as organisations start building their own acquisition solutions. In the end, all financial industries are trying to reach a similar goal – a secure, reliable, compliant and efficient digital acquisition service for its customers.