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Exclusive: Blockchain at the Stage of Tech Convergence

Exclusive interview with Paul Sin: Part 2

How does Deloitte Blockchain Lab envision the future of blockchain? Dr. Paul Sin believes that blockchain is at the stage of technology convergence with IoT, big data and artificial intelligence. He also explained the three challenges for enterprises to implement their own blockchain and various blockchain auditing services offered by Deloitte.

From your experience, what are the pain points for enterprises in implementing their own blockchain?

Since these are enterprise permissioned blockchains, one of the challenges is the commercial model. We need to figure out how these people share the cost of the platform. Going forward, [we need to look at] how they can recover their investments.

The second challenge is regulatory concerns, we need to comply with all the different regulations such as the GDPR in Europe, China’s cybersecurity law, Hong Kong’s PDPO. Liability issues are also a concern. If you are creating a KYC network, for example, if Bank A opens an account for terrorists and Bank B finances the terrorists based on the records from Bank A, who will bear the liability for terrorist financing? This will also be something we will need to sort out. We classify these problems as the governance model.

The third challenge will be the interoperability of the technologies being used by more than 20 platforms on trade finance and supply chain across the world that are in production. You need to exchange data across different distributed ledger technologies, you need to interoperate on Corda, Hyperledger, Ethereum, and also connect the Internet of Things (IoT) with blockchain so that the physical products can be linked to the digital record of the blockchain. You also need to create advanced analytics models that will make use of the data on the blockchain. There is a lot of technology convergence happening at the moment in the market. This is a challenge but also an interesting part of the technology.

Which blockchain-as-a-service (BaaS) platforms are the most popular from your experience working with enterprises, and what are the reasons behind choosing them?

We generally recommend open-source platforms for our clients because it enhances adoption. Even though we deploy blockchain on hybrid cloud infrastructure, we try not to use managed blockchain services unless they are truly open. Some cloud providers have BaaS with open-source technology; those would be the ones we are more comfortable working with. Some blockchain services providing blockchain on a proprietary platform—if one party is on that platform, the whole ecosystem must be using that vendor—those are not recommended. If you see some corporations working with certain well-known vendors who provide proprietary managed blockchain on the cloud, they will have a lot of challenges with adoption. A corporation may find that only they are on the blockchain and no other corporations are willing to join, mostly because the platform is proprietary. This is the reason why it is not attractive from the perspective of supporting the whole ecosystem.

From a corporate perspective, it can certainly save time developing and deploying the technology, so using blockchain managed by the cloud is understandable.

How do you envision the future of blockchain and what is your outlook for enterprise blockchain adoption?

We are now getting to the stage of convergence, as I mentioned earlier, it is now feasible to exchange data with each other without compromising on the authenticity and authorization mechanism. We are also working on technology convergence, where IoT puts data on the blockchain to share among exclusive members, we create a big data pool for the whole ecosystem and we run AI engines on top of that to create insights for analytics. This is what we are working on at the moment.

Other Big Four auditing firms—PwC, KPMG, EY— have launched blockchain auditing services. Does Deloitte have blockchain auditing services currently?

Yes, we have blockchain auditing services. Blockchain auditing is a very confusing term, there are different kinds of blockchain auditing. If a company has certain assets, stored in a crypto format, you will need financial auditing, which is a kind of blockchain auditing. There are also ICOs, STOs, stablecoin issuances, etc., and those need audit firms to audit liquidity, for example. We also conduct IT audits for blockchain platforms, to make sure they are not breaching any technology risks or guidelines, from regulators as well as data privacy auditors.

What are your views on consensus as a service?

I believe this is more for public blockchains because in public blockchains, consensus is very resource-consuming, and it does not make sense to build ASIC server farms in order to create consensus. For permissioned blockchains that we use, the underlying consensus mechanism is very light in terms of power consumption. Many new permissioned blockchains support plug-and-play consensus mechanisms, all of which are open-source, and do not need to do any outsourcing for them.

PwC: Crypto M&A and Fundraising in Asia Reports Major Growth

Crypto activity has shifted significantly from the Americas to APAC/EMEA
Crypto equity fundraising ticket sizes have increased by 50%
Crypto M&A and fundraising activity have increased by 51% in 2019

PwC previewed its latest white paper—PwC Global Crypto M&A and Fundraising Report—last Thursday at CoinDesk’s Invest: Asia event. The report was further shared by Henri Arslanian, the global crypto leader at PwC, via LinkedIn. This is the first report by PwC on the broader crypto ecosystem, but the firm will continue to publish updates twice a year moving forward.

Insights

Both cryptocurrency M&As and fundraising deals in the Americas have fallen to 41% in H1 2019 in comparison to the 60% of overall global deals reflected in the data for H1 2018. Although the Americas still count as the key driver, Asia and the Middle East now assume the bulk of the activity with five out of the top ten crypto M&A deals. According to the report, the average crypto equity fundraising tickets have increased from US$6 million to US9million, marking a 50% increase in H1 2019 compared to H1 2018.

Despite a notable drop in the number of deals in Q3 2018, the crypto market rebounded in Q1 2019 and PwC reports an overall increase in crypto M&A of 15% activity at Q2 2019. Fundraising deals have also increased by 51% when comparing Q2 2019 vs Q1 2019.

Trends for Q3 & Q4 2019

Historically crypto fundraising and M&A appears to be positively correlated with the price of Bitcoin. PwC expects this trend to continue and recent surges in market activity should empower the cryptocurrency exchanges and leading industry players with confidence and it is expected that they will look to acquire and expand in the second half of 2019.

The noted rise of 51% in capital allocated to fundraising activities, from Q1 2019 to Q2 2019, indicates that investors may seek further exposure in the crypto market by backing institutional-grade companies.

The surge of activity in the crypto space from Q1 to Q2 2019 has seen many global players, who had up until recently been sitting on the sidelines, rejoin the market. PwC’s report indicates the accelerated involvement of these investors has been accelerated by the anticipated launch of Facebook’s cryptocurrency Libra and other recent macro events and announcements from major institutions.

Image via Needpix.com

PwC: Establishing Policies for Blockchain Governance

In a whitepaper published by professional services firm, PricewaterhouseCoopers (PwC), explored the challenges that current distributed ledger technologies (DLTs) face, as well as the strategies that the market is developing to deal with the limitations.

As the DLT space is developing and expanding rapidly, PwC suggested that this space might be currently the fastest growing area of innovation in the entire technology sector. PwC also indicated that “a strategy should be adopted to both foster innovation and control missteps that may occur due to experimentation and some inevitable misuse.”

Strategies suggested could range from the technical aspects, addressing scaling and privacy issuers, to establishing a new policy for creating an environment for technology.

Approaches to blockchain policies

A good policy, according to PwC, “should aim to achieve a stated set of goals, define its scope of operation, be clear on how to operate under it in a compliant manner, and define who the authorities are.” Policies are recommended to evolve continuously to adopt changing technological and regulatory environments.

Navigating the technological landscape

The solutions discussed in the whitepaper aims to establish ground rules to allow organizations to develop governance structures which will help them navigate the technological landscape.

Organizations are encouraged to adopt a technology-agnostic approach when implementing blockchain systems. Flexible policies towards blockchain are also suggested, as rigid policies could quickly become outdated. Innovative approaches are preferred over risk-averse approaches for the goal of launching successful initiatives.

PwC Singapore's Venture Hub, on the Investment Sentiment of Blockchain Startups

November has been a busy month for FinTech and the blockchain industry in Singapore. The Singapore FinTech Festival (SFF) and the Singapore Week of Innovation and TeCHnology (SWITCH) held 11 – 15 Nov gathered over 60,000 participants from 140 countries to foster the development of FinTech in Singapore. The Monetary Authority of Singapore (MAS) also announced key initiatives such as the joint development of FinTech Research Platform connecting investors and FinTech startups.

We arranged an interview with Lim Shu Ning, Director in PwC Singapore’s Venture Hub specializing in Blockchain during the SFF, which Shu Ning shared with us the investment sentiment of Singaporean blockchain startups and the state of enterprise blockchain adoption in Singapore.

Can you give us an overview of the Blockchain team in PwC Venture Hub? What is the scope of services that the team provides?

PwC Singapore’s Venture Hub adopts a one-stop shop approach to providing solutions, services and collaborating with motivated entrepreneurs, venture capitalists, incubators and accelerators within the venture ecosystem to help them expand into their key markets.

Our team focuses on fast-growing Tech startups including blockchain companies, using our expertise and experience to help founders grow their businesses. We work closely with the companies on areas such as fundraising, strategy, branding and M&A, IPO/ICO advisory to audit & regulatory compliance, legal & tax services and governance advisory.

What are the key pain points faced by blockchain startups in Singapore? What are some of the best advice you can give to these startups?

Blockchain is clearly a large part of what the Singapore Government sees to be an important and innovation-filled future for Singapore’s financial sector. Despite being a potential game-changer, there are also clear emerging doubts.

One particular concern is cost and efficiency. Given that the amount of resources and money spent, some perceive that substantial progress has not yet been achieved. Of the various use cases we see in the market, a large number may be still at the ideation stage, some might be in the developmental stage but not many are widely adopted or see the widespread application.

This leads to another pain-point which is to identify the right ecosystem partners. The value of blockchain is maximized when partners in the ecosystems work together and operating on a common chain. Currently, we see different organizations in the same industry sector developing many different chains and this is detrimental to the growth of blockchain. That being said, we do see potential interoperability across different blockchain solutions which help to harness efficiency for the ecosystems.

Blockchain companies should focus on creating solutions to solve real business problems through the trust that the blockchain brings, to ensure their products are viable and scalable. Blockchain technology is not the solution to everything, the right application to the right problem statement is the key.

Are there challenges to find the right talent for the fintech/ blockchain industry? What initiatives have been done to tackle talent shortages?

As with any new technology, blockchain is relatively new and will continue to evolve. At the moment, we note that there is indeed a limited supply of people with developed skills in this space. On the other hand, the demand for qualified talent is increasing and costly. And this is particularly challenging here due to Singapore’s relatively small population size.

Singapore has the potential to become an Asian Blockchain Hub with its blockchain-friendly regulations and government support in nurturing blockchain development. With the government’s support, we believe that Singapore will continue to attract and groom the right talent in the near future.

How would you describe the enterprise blockchain adoption in Singapore and what are the interesting use cases in blockchain there?

In PwC’s Global Blockchain Survey 2018, we noted that 46% of enterprise blockchain adoption resides in the Financial Services industry, 12% in the Industrial products and manufacturing, 12% in Energy and utilities, 11% in Healthcare. Other segments include government, retail and consumer sectors. This trend is quite in line with what we observe in Singapore as well.

Some of the interesting blockchain use cases we see include (just to name a few):

– Digital identity: Blockchain to create an auditable source of personal identity information shared and verified across multiple organizations. This also empowers users (like us) to have control over our digital identity and personal information.

– Supply Chain visibility: Blockchain eases the existing pain points of buyers, sellers and various parties across the supply chain. Some of the track & trace blockchain solutions we have seen allow traditional businesses to digitize their traditional products include food products into traceable digital assets to tackle some of the key issues in global trade including food safety and wastage.

– Record keeping: Blockchain provides a method for collectively recording and notarizing any type of data. This could include education records and certificates, healthcare records and more.

– Provenance: Blockchain offers an immutable and irreversible source of information that tracks true ownership as well as the authenticity of a product. We see more relevance for this application in the retail luxury products sector and high-value collectibles.

How would you describe the market sentiment on investing in Singaporean blockchain startups in terms of M&A deals and fundraising?

Market sentiment into investing in Singaporean blockchain startups is picking up. Previously investment was mainly in the form of token sales which are more speculative in nature. However as the market matures, sophisticated investors, as well as corporates, entered the fray seeing the potential of adding blockchain technology to traditional business or seeing the potential blockchain technology brought to different industries. Investment is now into the equity of the startup itself rather via a token sale.

Through our partnership with Tribe accelerator, we have seen first hand the kind of solutions that corporates are on the look-out for and that they have invested in. While most investments in startups are focused on taking a stake, we may see a growing number of M&A buyouts as these startups grow and as their solutions become more concrete.

We also note that investors are more keen to invest in blockchain startups with specific industry-focused solutions and where they are combining with other technologies such as IoT and AI; rather than blockchain developer companies.

Could Blockchain Increase Diversity in the Way Films are Nominated for the Academy Awards?

The film awards season has finally passed for the year and a look back over the last few weeks, unfortunately, uncovers lingering problems with diversity among the nominations for both the BAFTAs and the Academy Awards (Oscars).

Despite a push for inclusion following the #OscarsSoWhite boycott of 2015, there was uproar in the entertainment community as only one of the twenty nominations for acting went to an actor of color, Cynthia Erivo for Harriet. It should be noted that Spanish actor Antonio Banderas also received a nomination but does not count as a person of color by Hollywood metrics – more on this later. The 2020 Academy Awards also did not feature any women nominations for directing.

Due to some recent publications by Blockchain.News, and other sources promoting the application of blockchain technology into voting systems for greater transparency and trust, we have received a few questions from readers asking if it could be applied to the Oscar’s nomination system.

After taking a look at how the Academy nominates: the short answer is yes, blockchain can definitely enhance the process but, unfortunately, not in the way that people might like.

How Nominations are Made

Before we discuss how blockchain might improve the Academy’s nomination system, we need to see how it works. Below is a summary of the complicated process that goes into determining if a movie or talent gets nominated.

The voting process for nominations involves more than 8000 academy members as well as hundreds of eligible films, acting talents and production talents. The easiest way to achieve Academy membership is to have been nominated previously, but those who meet the criteria can apply – the criteria is based on history and credentials within the sector or being nominated by an existing member.

Members will vote in one of the 25 categories specific to their craft, for example, only Directors get to vote for Best Director nominees, Actors for the Best Actor Category etc. All members, however, may vote for the Best Picture category.

Ballots are sent to the voting members who are allowed to choose and rank five nominees in order of their preference, in their category.

Following the vote, the ballots are sent to accounting giant PricewaterhouseCoopers (PwC), who have handled the duties of mailing out ballots and tabulating the results for more than 80 years. It is up to PwC to find the magic number—the number of votes in each category that automatically turns a potential nominee into an official nominee.

To determine the magic number, PwC takes the total number of ballots received for a particular category and divides it by the total possible nominees plus one. As explained by MentalFloss, “An easy example is to take 600 potential ballots for the Best Actor category, divide that by six (five possible nominees plus one), thus making the magic number for the category 100 ballots to become an official nominee.”

In a process that is estimated to take 1700 hours, the counting is still done by hand and starts based on a voter’s first choice selection until someone reaches the magic number. For instance, if Brad Pitt reaches the magic number first for his performance in Once Upon a Time in Hollywood, the ballots that named him as a first choice are then all set aside, leaving four spots to be filled for the Best Actor category.

The actor who receives the fewest first-place votes is automatically knocked out, and those ballots are redistributed based on the voters’ second-place choices (though the actors still in the running retain their calculated votes from the first round). The counting continues, and actors or different categories rack up redistributed votes until all five spots are filled.

Blockchain for Reconciliation, not Diversity

The most obvious aspect of the above nomination process that could be enhanced by blockchain technology would be the reconciliation work done by PwC.

As stated above, the process of tabulating nominations takes PwC around 1700 hours at the expense of the Academy. The need for PwC, who are actually the secret stars of the show putting in the majority of the work, to even participate could be eliminated should the Academy adopt a voting system that leverages blockchain.

PwC approaches the tabulation of votes in a traditional auditing sense which requires the confirmation of votes and sorting of preferences on its own accounting ledgers at the end of the tabulation period. As mentioned above, PwC still does this by hand which is not only time-consuming it also opens the process up to human error and requires everyone to simply trust they have counted them in an unbiased manner. We would state here that Blockchain.News respects the integrity of PwC but we are simply saying that no one is going to recount them and check if the big four firm was correct.

Blockchain, in theory, solves almost all the issues, providing the immutable record of transactions almost immediately and automated processes can again instantly determine the ranking of nominations.

According to an article published on Medium, “ Due to its distributed ledger technology, blockchain technology eliminates the need of entering accounting information into multiple databases and potentially removes the need for auditors to reconcile disparate ledgers, whereby substantial amounts of time could be saved and the risk of human error be considerably reduced.”

Taking it a Step Further

As mentioned in the introduction there has been a push for inclusion following the #OscarsSoWhite movement of 2015. The movement creator April Reign believes that while things are changing they are not changing fast enough, she said, “When I created #OscarsSoWhite in 2015, the Academy membership was 92% white and 75% male. The Academy has improved those numbers a bit, and now its membership is 84% white and 68%, male. So yesterday did not come as a surprise. When I saw the nominations, I was disappointed that there were so many talented filmmakers who were not going to be acknowledged and recognized by their peers.”

Spike Lee also spoke out against the lack of diversity in the nominations during an interview with the BBC, where he mainly discussed streaming services, saying that while the small players are changing, it is the gatekeepers who stay the same and stop inclusion.

While I could offer a range of reasons why they may feel this way, I am neither qualified nor want to delve into the mess of intersectional diversity that is proudly championed by the words, not really the actions, of most Hollywood stars. While there are strong cases for diversity and inclusion actions, there is, unfortunately, a lot of evidence to suggest that Hollywood in the majority holds a very radicalized extreme left view of the world and tends to be too woke.It also helps to remember that there are only so many open positions for nomination and “the Academy” as an institution doesn’t really do anything—votership is nothing more or less than an average of individual tastes and preferences of this woke community. It is, in fact, the fault of the directors who voted that there were no women nominees and only one qualifiable person of color nominated for their performance, sorry Banderas.

The suggestion is that without complete and equal representation of every race and both genders, the nominations will remain unfair. The real issue at this point, however, appears to be that despite the diversifying action succeeding in increasing minority representation, the votes are just not correlating the way Hollywood social science majors thought they would.

Without digressing further into whether Hollywood expectations are realistic or not, how could blockchain be applied here? Using blockchain, it would be possible to track and make public the voting habits of every single member and see exactly who they nominate. While this would allow transparency, it would open the voters up to a routine Hollywood witch-hunt which may also influence the vote unnaturally and cause people to vote for whatever movie best encapsulates the current political zeitgeist. This is not really a solution as which films get nominated are the culmination of very subjective views on a very subjective art form and, given the lack of restraint that Hollywood shows in light of real-world issues that are too complex to be summed up in a sound bite, would open up the voters to a world of subjective criticism.

"The Wars to Come," Blockchain – A Game Changer for Auditors

Every industrial revolution was driven by different automation. The “Steam Engine” began the “First Industrial Revolution”, Previous industrial revolutions were driven by “Factory Machines and Fossil Fuels”. Whereas, the on-going automation revolution is based on “Data-Driven Artificial Intelligence” (AI) and “Blockchain Technology”.

If “data is the fuel “of the Fourth Industrial Revolution, “blockchain will be the engine” driving it forward. Both of them have a positive relationship because blockchain distributed ledger nature allows for safe and secure storage of data. Working together not only will advance their own adoption & implementation but will shape the next Industrial Revolution.

“Blockchain is a decentralized ledger of transactions across a peer-to-peer network that cannot be changed, tampered with, or lost due to blockchain’s decentralized and distributed nature. The blocks in a Blockchain consist of digital information (“block”) stored in a public database (“chain”).

Blockchain technology was first introduced as the core technology behind digital currency bitcoin, but it has now evolved far beyond bitcoin and has the potential to transform and disrupt a multitude of industries, from financial services to the public sector to healthcare.

Among various use cases are payment processing, online voting, executing contracts, signing documents digitally, creating verifiable audit trails and registering digital assets.

Blockchain Impact on Accounting & Auditing World

Blockchain-based world would create new requirements for audits with new risks. A blockchain ledger would provide an assurance baseline that eliminates the need for traditional auditing entirely as blockchains, by definition, create up-to-date immutable, historical records.

This technology has the potential to impacts all record-keeping processes, including the way transactions are initiated, processed, authorized, recorded and reported. All information is recorded in real-time which is immutable and it brings transparency in financial reporting and accounting process with certainty over the provenance (origin) of those transactions.

Distributed ledgers working together with artificial intelligence can automate a range of processes, from payments through to foreign exchange trades and the filing of tax returns.

“Auditors will need the skills and capabilities to review blockchains as they are created.”

Blockchain Feature- Immutability & Transparency

In Blockchain immutable accounting records are created. Manipulating transaction entries to falsify or eliminate them is practically impossible. Since all the information is stored as a block and every block is associated with others, anyone trying to change one block needs to alter the associated blocks which becomes a daunting task for the hacker.

Auditors spent a lot of time in the verification of the transactions trail to ensure there is sufficient evidence and information is transparent. The use of Blockchain will save time that traditionally goes in manual auditing & detailed analysis. That time can be utilized in formulating more strategic work & delivering future business value.

Blockchain Feature- Real-Time

Gone are those days when auditors had to wait for it for the end of the year or month to carry out the audit.

In blockchain all the information is recorded on “Real-Time” i.e it is time-stamped. By the use of blockchain technology, it is now possible to perform an audit whenever it is required improving the pace of financial reporting and auditing.

A blockchain-based ledger lays out the entire history of related transactions, updated in real-time and visible to all parties involved — creating a clear, auditable record that is virtually impossible to falsify or destroy, promising to radically improve the fight against challenges like fraud and money laundering.
Malcolm J. Murray, Fellow and VP, Gartner

With access to unalterable audit evidence, the auditor could have real-time data access via read-only nodes on blockchains. Blockchain combined with artificial intelligence could transform the way in which fraud investigations and forensic accounting are undertaken.

The real-time systems would highlight and investigate anomalies and unusual transaction patterns as they emerge. It cannot eliminate fraud completely; however, it may help identify fraud in real-time.

Blockchain Challenges “New world of digital risk”

Blockchain-based world would create new requirements for audit with new risks. While block chain’s design brings transparency, immutability and security in the transactions, but still the occurrence of frauds cannot be eradicated. The Blockchain environment is still susceptible to various technology risks.

The auditors will need to audit whether the distributed ledger systems are working correctly.
Professor Nigel Smart, University of Bristol

In Blockchain the data is validated by a majority of other users on the system. If the majority of the users on the distributed ledger become corrupt, it is possible to break the chain.

The DAO–HACK

Blockchain can also be vulnerable to programming mistakes, for instance in June 2016, Swiss-based DAO – actually called “The DAO” lost virtual currency when a hacker found a loophole in the coding that allowed him to drain funds from The DAO. In the first few hours of the attack, 3.6 million ETH were stolen, the equivalent of $70 million at the time. Once the hacker had done the damage he intended, he withdrew the attack.

The DAO was a digital decentralized autonomous organization and a form of investor-directed venture capital fund. It launched in April 2016 after a crowdfunding campaign. The DAO had an objective to provide a new decentralized business model for organizing both commercial and non-profit enterprises.

The DAO’s hack was not due to a problem inherent on the Ethereum blockchain; it came from a coding loophole exploited by an intelligent hacker. Had the code been written correctly, the hack could have been avoided

There is currently no standard way to validate blockchain-based business processes and the related control environment.

The reality is that no system is flawless – not even blockchain.

Assess the Reliability of the Blockchain Consensus Protocol

Auditor needs to understand and assess the reliability of the consensus protocol for the specific blockchain taking into risk consideration of whether the protocol could be manipulated.

Evaluate Management’s Accounting policies for Digital Assets

Auditor will also need to evaluate management’s accounting policies for digital assets and liabilities, which are currently not directly addressed in international financial reporting standards or in the U.S. generally accepted accounting principles.

Auditors will always be needed to design the appropriate audit strategies in complex systems making decisions about what level of audit is required, how data should be captured, and the type of audit analytics that should be applied.

No way to Reverse Transactions

In a case, if a user accidentally or deliberately transfers an amount (in the form of digital currency) to the wrong or unauthorized address (recipient) account, then there’s currently no way to reverse the transaction.

To avoid such situations, Auditors are therefore required to assess whether effective automated controls General information technology controls (GITCs) related to the blockchain environment are in place to validate transactions before they are executed.

Impossible to recover the Account if Private key is lost

If in any case, a user loses his private key (e.g. through a software or hardware malfunction), then the user loses his access to his virtual currency account. All his amounts will remain inaccessible forever and cannot be recovered easily.

Auditors need to review effective disaster recovery procedures are in place and verify whether controls that address the risks associated with blockchain can be relied upon.

No Reporting Authority

If an entity experiences a phishing attack, there is no central authority to report any incident since in blockchain there is no central administration. This situation can also translate into a risk of fraud.

When faced with such risk, Auditors will be expected to determine whether internal controls to prevent and detect phishing attacks are indeed operating effectively.

Top Auditing Firms have Undertaken Blockchain Audit Initiative

An auditor will need to stay abreast of recent developments in this space to consider how to tailor audit procedures to take advantage of blockchain benefits as well as address incremental risks.

EY has recently announced the launch of its “Blockchain Analyzer tool” to help audit teams assemble an organization’s entire transaction data from multiple blockchain ledgers. It also supports testing of multiple cryptocurrencies managed or traded by exchanges and asset managers.

PwC has also launched”Blockchain Validation Software”, which combines risk & control framework with continuous auditing software. It will test for anomalies in real-time.

The Committee of Sponsoring Organizations of the Treadway Commission, or COSO, is developing voluntary guidelines for companies to strengthen their oversight of blockchain-technology projects. The guidance is expected to be released in the first quarter of 2020.

Blockchain technology has the potential to upend Audit, Assurance and Control functions —Auditors need to stay attuned to emerging use cases — As Role and skillsets of Auditors will change as new Blockchain-based techniques and procedures emerges.

Get ready for “The Wars to Come”

PwC Reports Huge Shift in M&A and Fundraising from US to Asia and EMEA in 2019

In 2019, crypto fundraising and M&As began migrating over to Asia, Europe and the Middle East and saw a lack of new VC investments as the majority of funding came from crypto firms within the industry, according to PwC’s latest report released on April 6.

PwC Global Crypto Lead, Henri Arslanian discussed the 2nd Global Crypto M&A and Fundraising Report’s findings with Blockchain.News and offered his take on what they mean for the digital ecosystem.

Crypto fundraising and M&A moving to Asia and EMEA

As outlined in the report, the majority of global crypto fundraising and M&A deals in 2019 took place outside of the United States with increased activity in both APAC (29%) and EMEA (22%) recorded.

In 2019, it was found that traditional VCs, crypto-focused VCs and family offices represented the majority source of new funding, with a share of 57%, for crypto companies. These new findings mean that crypto firms now represent the majority of M&A in the sector which is an increase compared to 2018’s 42%.

Arslanian said, “We expect to see APAC and EMEA play a bigger role in the global crypto fundraising and M&A space. In particular, we expect to see more APAC and EMEA based family offices looking at the market turbulence as a good time to invest in promising crypto companies.”

In total, the number of M&A deals recorded in the report dropped from 189 in 2018 to 114 in 2019, while the actual value of M&A deals plummeted by 76 percent from nearly two billion dollars to just under half a billion. Arslanian commented, “The crypto industry is not immune to the global headwinds and the number and value of crypto fundraising and M&A deals may be impacted in 2020.”

Top 5 Investor Deals in 2019 Compared to 2018Per the report, while 2018 saw traditional VCs andincubators among the top investors, 2019 saw a contrast with the majority of funding provided by crypto-focused incumbents like Coinbase and ConsenSys.Source: 2nd Global Crypto M&A and Fundraising Report

Crypto Companies Offer Complimentary Services to their Core business

Whilst 2018 saw a lot of crypto fundraising in blockchain infrastructure projects or M&A in the crypto mining space, 2019 saw a rise in investments in solutions for the crypto ecosystem like compliance and regulation; as well as M&A activity in the crypto service providers.

“We expect to see further consolidation in 2020 with some of the larger or more profitable players acquire firms that offer ancillary services to their current offering in areas like crypto media, research or even compliance,” said Arslanian.

PwC’s Global Crypto Team  

These latest insights come from PwC’s Global Crypto Team which has continued to lead research in the space since its inception. Henri Arslanian discussed the ever-growing role of his team in interview with Blockchain.News in January.

In the last 2 years, PwC has conducted over 320 crypto engagements globally, spanning across 15 different countries. “I think it’s very exciting to see how PwC is getting involved in the crypto ecosystem,” said Arslanian. “Our purpose is to build trust in society and solve important problems and there is a big need for that in the crypto and blockchain ecosystem. We set up this PwC crypto team almost three years ago as the crypto ecosystem was growing, to support crypto firms not only on areas like strategy or fundraising but also on day-to-day functions such as crypto accounting, tax or KYC/AML reviews.” Arslanian believes that firms like PwC are essential for the ecosystem to “go from 1.0 to 2.0,” and “that PwC has a big role to play.”  

PwC Expert's Take: What Are the 3 Grey Areas to Crypto Taxation in Hong Kong?

The Inland Revenue Department (IRD) of Hong Kong took a step further to provide clarity in taxing digital assets. In the recent press release titled “LCQ20: Regulation of virtual asset investment activities”, James Lau, the Secretary for Financial Services and the Treasury answered the queries raised by the Hon Wu Chi-wai on taxation of virtual assets, tax evasion of virtual asset-related business and latest effort to regulate virtual assets by the Hong Kong Securities and Futures Commission (SFC).

In the press release, Wu questioned whether business operators are required to pay taxes for transactions conducted using virtual currencies. With reference to the Inland Revenue Ordinance (IRO), except for profits from the sale of capital assets, the profits tax is applicable to any profits arising in or derived from trading and business activities carried on in Hong Kong. Lau stressed that the provisions regarding profits tax in the IRO and the relevant case law also applies to virtual assets transactions. The IRD has revised its Departmental Interpretation and Practice Notes (DIPN) No.39 last month and elaborated that the profits from trading, exchange and mining of cryptocurrencies are chargeable to profits tax. The amount of sales and purchases is reflected by the market value of cryptocurrency accrued at the date of the transaction.

The existing rules under IRO also apply to tax evasion of virtual asset transactions. To enhance IRD’s capability in detecting tax avoidance and evasion, the IRD will seek relevant information from other tax authorities through the exchange of information mechanisms under tax treaties.

Further to the regulation imposed by the SFC in November last year, the SFC and the Financial Services and the Treasury Bureau (FSTB) are closely monitoring the need to regulate the virtual assets trading platform (VATP). The SFC is currently discussing with some VATP operators and will determine how to regulate VATP after the exploratory stage.

Hong Kong’s Framework to Classify Digital Tokens

In the revised DIPN, the IRD classified digital tokens into three categories:

1) Payment Tokens

Payment tokens are regarded as virtual commodities but they are not legal tender in Hong Kong. They are used as a means of payment of goods and services but they don’t provide holders any right or access to goods. Bitcoin is a prominent example of payment tokens.

2) Security Tokens

Security tokens represent ownership interests in the business and debt due to the business. Holders of security tokens are entitled to a share of profits in the business.

3) Utility Tokens

Utility tokens provide the holder with access to particular goods or services typically provided by the blockchain platform. The token issuer commits to accept the tokens as payment for particular goods or services.

Grey Areas Remain for HK Crypto Taxation

A lot of regulatory clarity has been observed in cryptocurrencies for the last two years, with only 5% of regulators worldwide who do not have a team working on cryptocurrencies. This is not the case with tax authorities, and Henri Arslanian, PwC Global Crypto Leader explained that regulating cryptocurrency taxation can be challenging as the project teams have decentralized operations, which creates transfer pricing and other tax issues to be addressed.

In Hong Kong, while the latest revision of DIPN provided further clarity to regulate the taxation of virtual assets, PwC recently published the report titled “Hong Kong IRD issues guidance on cryptocurrency taxation” to highlight three grey areas where the HKIRD needs to address in the future.

1) Treatment of unrealized gains/losses

The IRD has not decided on the treatment of fair value gains and losses that may arise from the year-end revaluation of digital assets used to carry on a cryptocurrency business. PwC believes that the treatment should depend on the nature of digital assets: capital or revenue.

If the digital assets are revenue in nature, the principles in the Nice Cheer Case should be followed which the Court of Final Appeal established that unrealized gains from the increase in the value of a trading stock should be taxed at the time of realization. However, the provisions under the Inland Revenue (Amendment) (No. 2) Ordinance 2019 can serve as the exception which allows taxpayers to elect to be taxed on a fair value basis of financial instruments accounted in accordance with Hong Kong Financial Reporting Standard (HKFRS) 9/International Financial Reporting Standard (IFRS) 9. However, the IRD may consider providing a concession or making legislative changes since some digital assets may fall outside the scope of HKFRS 9 and IFRS 9.

Gwenda Ho, PwC Tax Partner spoke exclusively to Blockchain.News, “To the extent that these unrealized gains/losses are revenue in nature, the uncertainty is whether these should be taxable/deductible at the time of recognition in the profit and loss account, or on a realization basis. The issue is complicated by recent case law and legislative changes in relation to financial instruments. Although this is a timing issue, it may create an administrative burden.”

2) Profits tax exemption for qualifying investment funds

The Unified Fund Exemption regime enacted in 2019 provides that all privately offered onshore and offshore investment funds operating in Hong Kong, can enjoy profits tax exemption for transactions of qualifying assets. The current qualifying assets exclude digital assets.

The SFC has published a circular to regulate crypto fund managers in November 2018. PwC suggested the government to consider the extension of crypto investment funds as part of the qualifying assets in the Unified Fund Exemption regime.

Ho explained on the availability of profits tax exemption, “As digital assets that are not securities would not be qualifying assets under the unified fund exemption regime, crypto funds investing in such digital assets may not be able to enjoy the tax exemption. Hong Kong may risk seeing such businesses move to other jurisdictions if the regime cannot be extended to cover crypto investment funds.”

3) Potential adverse tax implications with crypto borrowing and lending

In the DIPN No.42, the IRD assesses financial instruments by first deciding its nature according to its legal form rather than the accounting treatment or the underlying economic characteristics. The determination of the legal form of a financial instrument will examine the legal rights and obligations created by the instrument.

A crypto transaction may lead to a change in legal title, thus there is a risk that the instrument would be regarded as a disposal by the lender and acquisition by the borrower of the coin, and the realized gain or losses could be included as the lender’s taxable profits.

As the current relief may not be applicable to crypto borrowing and lending transactions, PwC suggested the IRD to consider extending the relief to cover crypto transactions. Ho elaborated, “Given that a crypto lending transaction may constitute a change in legal title, there is a risk that it would be regarded as a disposal by the lender and acquisition by the borrower of the coin, in which case the realized gain/loss could be included as the lender’s taxable profits. Provisions in the current tax law that provide relief for securities borrowing and lending transactions may not be applicable to crypto borrowing and lending transactions.”

Complexity to tax cryptocurrencies

The complexity to handle the taxation of cryptocurrencies is beyond the current framework laid by the IRD, which Arslanian advised to cryptocurrency startups, “The biggest piece of advice I would give to any crypto company around the world is that you should make sure to consider the impact of accounting and tax before you start because, in addition to avoiding future headaches, there could be benefits and tax savings in properly structuring beforehand.”

PwC also raised more scenarios to illustrate the potential complexity in taxing cryptocurrencies, for example, the source of profits arising from cryptocurrency mining in proof of work vs. proof of stake models; Management of permanent establishment risks; whether the transfer of digital assets to give rise in stamp duty. These issues can be interesting for regulators to consider in the future.

Paul Tudor Jones' Bet on Bitcoin Supported by CME’s Bitcoin Futures CFTC Data and PwC’s Latest Crypto Report

Paul Tudor Jones: The Great Monetary Inflation

Billionaire hedge fund manager Paul Tudor Jones was reportedly looking to buy Bitcoin to hedge against inflation as central banks across the world are printing money to relieve economies affected by the coronavirus pandemic. Jones is one of Wall Street’s most seasoned and successful hedge fund managers, CEO and founder of Tudor Investment Corp, a hedge fund that managed $8.4 billion assets under management as of March 30, based on data from the Securities and Exchange Commission.

Jones compared Bitcoin to gold by saying that the digital currency reminds him of the role that gold played in the 1970s. Jones was well known for his correct prediction of the 1987 market crash and shorted Japanese equities several years later before Japan’s economy crashed.

Jones said in an investor letter, called The Great Monetary Inflation, “The best profit-maximizing strategy is to own the fastest horse. If I am forced to forecast, my bet is it will be Bitcoin.” As money-printing will push traditional investors to gold, he believes that the world will then “crave new safe assets,” which may be beneficial to Bitcoin. He added, “Quite often, how the markets respond will be at odds with your priors. But remember, the P&L always wins in the long run. With that in mind, in a world that craves new safe assets, there may be a growing role for Bitcoin.”

Last week, Arthur Hayes, CEO of one of the world’s largest crypto exchanges, BitMEX tweeted that Jones has made the right move to invest in cryptocurrencies such as Bitcoin, and has removed career risks by doing so.

PwC’s latest crypto hedge fund report

In an annual report by Elwood Asset Management and consulting firm PricewaterhouseCoopers (PwC), the value of assets under management at cryptocurrency hedge funds has soared to $2 billion, doubling the value in 2019.

With over 50 funds surveyed, most crypto hedge funds trade Bitcoin (97%), and Ethereum was the next most popular crypto (67%). Around half of the crypto hedge funds trade derivatives or were active short sellers.

The coronavirus pandemic has led to an inquiry of how hedge fund managers reduce counterparty risks, as the use of independent custodians has also surged from 51 percent in 2019 to 81 percent in Q1 of 2020. Henri Arslanian, the co-author, and PwC Global Crypto Leader said, “The changes the crypto hedge fund industry has seen in the past 12 months, from additional regulatory clarity to the accelerated implementation of best practices are great examples of how fast the industry is becoming increasingly institutionalized.”

The report also highlighted that of the 150 active crypto hedge funds around, about 63 percent were launched in 2018 or 2019. The launch of the actively managed crypto funds is also highly correlated with the price of Bitcoin. As the price of Bitcoin surged exponentially in 2018, it became a breeding ground for new crypto funds. There was also a correlation observed at the end of 2019, as Bitcoin faced a bear market, there was also a decline in new fund launches.

According to CFTC data, CME Group Bitcoin futures saw a record number of large open interest holders this week, at 66. Long open interest from hedge funds trading Bitcoin futures also high an eight-month high, reaching over $15 million on May 5.

PwC: Blockchain Technology Has the Potential to Boost Global GDP Up $1.76 Trillion By 2030

In an analysis of blockchain’s impact on businesses and global economies, PricewaterhouseCoopers (PwC) indicates that by 2030, the impact of blockchain could be so significant that the technology has the potential to boost global gross domestic product (GDP) by $1.76 trillion.

How could blockchain benefit the world?

While blockchain is most known as the underlying infrastructure supporting cryptocurrencies, PwC experts reviewed other key advantages of the distributed ledger technology (DLT).

The new report released by PwC assessed how blockchain technology could be leveraged to benefit and boost the economy worldwide. Five case scenarios in which blockchain could be used to drive the digital revolution forward included provenance – the tracking and tracing of products and services – payments and financial services, identity management, and the application of blockchain in contracts and dispute resolution as well as customer engagement.

The analysis evaluated blockchain technology’s potential across different industries, from healthcare, government and public services to finance, logistics, retail, and more.

Speaking about the potential ways blockchain technology could be used, Steve Davies, a Partner and Blockchain Leader at PwC UK, said:

“Blockchain technology has long been associated with cryptocurrencies such as Bitcoin, but there is so much more that it has to offer, particularly in how public and private organisations secure, share and use data.”

Who would benefit the most from blockchain?

According to PwC analysts, Asia stands to reap the most economic benefits from blockchain technology over other continents.

In terms of countries, China and the US were designated as the ones that could potentially gain the highest net benefits from blockchain, estimated at $440 billion and $407 billion respectively, according to data from PwC. The net benefits of five countries, notably Germany, Japan, the UK, France, and India were also calculated to surpass $50 billion.

However, from one country to another, the sectors that would reap the highest benefits from blockchain technology differed. While the US stands to benefit the most from leveraging blockchain for security, payments issuance, identity, and credentials purposes, China and Germany would gain from using DLT more for provenance and traceability, as both countries possessed manufacturing-focused economies.

Overall, across all sectors, the public administration, healthcare, and education industry appears to be the biggest beneficiaries, with PwC expecting them to gain approximately $574 billion by 2030 through using blockchain for identity and credentials.

Blockchain adoption accelerated by COVID-19

Speaking of blockchain digital innovation and of its budding potential amid the economic havoc caused by the coronavirus pandemic, Davies remarked:

“As organisations grapple with the impacts of the COVID-19 pandemic, many disruptive trends have been accelerated. The analysis shows the potential for blockchain to support organisations in how they rebuild and reconfigure their operations underpinned by improvements in trust, transparency and efficiency across organisations and society.”

Findings from PricewaterhouseCoopers revealed that two-thirds of CEOs surveyed – 61% of them – placed “digital transformation of core business operations” among their top three priorities in their quest to rebuild their commerce from damage caused by COVID-19.

If blockchain’s economic potential was achieved, PwC and sector experts warn that the distributed ledger technology’s energy overhead must be managed properly. The impact of technology and global energy consumption by various organizations must be taken into consideration to reduce climate change repercussions.