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Blockchain: All hype or a game-changer?
BLOCKCHAIN
ALL HYPE OR A GAME-CHANGER?
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Touted as the most significant innovation since the internet, the blockchain holds much promise and power, but among CFOs this technology is often misunderstood, distrusted, or even viewed as hype. So, is it time to jump in, or wait it out? By Ang Lloyd
According to the International Data Corporation, global blockchain spending among organisations is set to reach nearly $6.6 billion this year – already up by more than 50 percent in 2020, with the banking sector making up nearly 30 percent of 2021’s worldwide total. Much like artificial intelligence, the blockchain is fast becoming more of a business priority and less of a disruptive experiment, and it isn’t limited to cryptocurrency, either: digital rights management, smart contracts, physical asset sales, and supply chains all fall under this technology’s gamut.
“If we don’t get ahead of it, we'll be washed away,” maintains Tramayne Monaghan, CFO and CIO at Tencent Africa. “One day you may be on the back foot because your biggest competitor embraced the blockchain and you didn’t. There’s a massive swell that's building.”
What is the blockchain, exactly?
Blockchain technology was created in 2008 by Satoshi Nakamoto – an individual (or possibly individuals) whose identity remains a mystery – as the transaction ledger for Bitcoin. Not to be confused with the cryptocurrency, the blockchain is what Bitcoin is built on. Essentially, it is a distributed (shared) ledger on a network that allows its members to record the origin or trade of any digital asset. The ledger is immutable, meaning that an asset’s records, like transactions or tracking, can’t be changed or deleted. Records contain ‘blocks’ of data with timestamps and an encrypted code called a hash. Each block builds on the next using a new hash that contains information about the previous block – this creates a ‘chain’ of encrypted data. For a block’s information to be altered in any way, a consensus among the network’s members must be reached, which makes any
Banking and the blockchain
China is the leader of the global blockchain pack, especially in the banking sector. The China Construction Bank has built a blockchain where 75 financial institutions can identify risky borrowers and compete to offer lower rates to more desirable ones. Crucially, the platform cuts out Swift. Closer to home, the South African Reserve Bank (SARB) piloted a blockchain solution called Project Khokha in 2017. In partnership with seven commercial banks, and tokenising the ZAR, the SARB executed 70,000 transactions (and maintained privacy) in less than two hours, speeding up one business day’s transaction processing time by 75 percent. Usually, a single payment requires four transactions to complete, but since all seven banks had permissioned access to the same ledger – that contained all the records for every single transaction – they could pay one another directly. Ian Putter, head of the Blockchain Centre of Excellence at Standard Bank. notes that next-generation blockchains can do up to 100,000 transactions per second, and cost from 100th to 1,000th of a US cent per transaction; they also have built-in reporting and tracking capabilities, along with robust privacy. Project Khokha II is in progress, and big-name players like Standard Bank are involved. Standard Bank has recently launched the Blockchain Research Institute in partnership with Don and Alex Tapscott (authors of Blockchain Revolution), and they hope to create a blockchain community across Africa to facilitate the growth of this technology. “Standard Bank is deploying live, scalable blockchains,” says Ian. “One is a payments blockchain that allows global importers to pay suppliers and utilises smart contract capabilities, where it validates and matches data and beneficiaries. More South African corporates are looking to collaborate with us, too, from healthcare to hedge funds. We can speed up payments and democratise banking services if we use distributed ledger technology in the banking sector; there are use cases across the world.”
Jo-Ann Pöhl
changes incredibly difficult to implement and eliminates fraud.
The blockchain is decentralised, so no single entity or third party has control over transactions or records. It also allows for immediate, transparent, and permissioned peer-to-peer interaction, and new data can only be added after it’s verified by everyone in the network. Each transaction is only recorded once, and if there is an error then a new transaction must be added to reverse it, and both transactions are then visible to the network.
In simple terms, a distributed ledger is like a shared-access Google sheet or a torrent download (if you remember those heady, pirated, pre-streaming days). “You're dealing with data from a multitude of devices at the same time, so no one person stores it at any one time,” explains Tramayne. "Pieces of information exist on multiple servers in multiple forms that can't be changed or reversed but are distributed – it's everywhere and everyone who has permission to be on the network has a copy.”
From blood diamonds to digital identity
Although the most well-known use case of the technology is cryptocurrency, almost anything of value can be traded or tracked on the blockchain, such as property, payments, copyrights, currency, collectables, supply chains, or computer code. Every detail about a transaction on the distributed ledger can be seen by the network’s members, and this technology is already being piloted across the continent. Diamond giant De Beers has used a blockchain to track its registered diamonds to determine if they’re conflict free and authentic, the Democratic Republic of Congo is using the technology to monitor cobalt mining for child labour, and local pulp and paper company Sappi is using a blockchain in a partnership with an Indian fabric producer to verify sustainability practices. “With the blockchain, any asset can be digitised by ‘tokenising’ it,” says Ian Putter, head of the Blockchain Centre of Excellence at Standard Bank. “Accounting entries will still exist, but you’ll use a shared ledger – it will make old processes redundant, mundane tasks will be eliminated, and no single person or centralised entity will be a gatekeeper.” On the continent, South Africa, Kenya, and Nigeria are leading the way with blockchain pilots and implementations, and key sectors that are embracing this technology include banking, the supply chain, and healthcare. Governments
open to it.” Tramayne Monaghan
have begun piloting it, too. In April this year, Ethiopia signed the largest blockchain deal in history to create a national database of student and teacher IDs using a decentralised digital identity solution, which will manage the digital identities of millions of Ethiopians to track their educational and career progress. Blockchains could also be key to inclusive trade and business growth in Africa: a blockchain-powered, shared African digital currency would eliminate the long-standing problem of not being able to convert the region’s different fiat currencies. Coupled with the African Continental Free Trade Area (AfCFTA), the blockchain could facilitate barrier-free trade between African countries and accelerate pan-African economic growth.
Decentralisation is already here
Jo-Ann Pöhl, iOCO group CFO, points out that the internet has allowed us to digitise currency and its exchange, so the shift to decentralisation has already happened – albeit in places where weaknesses provide opportunities. “Mobile wallets in some areas of Africa have replaced or superseded weaker banking sectors,” she says. Jo highlights that e-wallets and other walled-off value exchange platforms, which are already in our market, have formalised the concept of decentralised money or value tokens. “Is anybody certain about what is being exchanged when someone sends someone else airtime? You can call them vouchers, tokens, or coins, but these are digital currencies, and we are already comfortable exchanging them, because we understand the value they hold and we can unlock and use that value.” What we don’t have yet, adds Jo, is interoperability, because this is what is licensed and controlled. “Governments, as the underwriters of currencies, will be impacted by this and when we see legislation such as open banking in Europe and similar changes in other markets, we begin to recognise that trying to protect these walls or barriers to entry will not stop this fundamental shift from continuing.” Thanks to an insatiable appetite for cryptocurrency – at the start of this year, the daily value of crypto-asset trading exceeded R2 billion for the first time in South Africa – a decentralised finance system is now running parallel to the traditional system, as peer-to-peer transactions are gaining ground over banking. And as crypto-assets become increasingly popular, so has talk of regulation become louder: a much-needed step, as currently cryptocurrency investors have no protection. Just look at Africrypt, where two South African brothers skipped the coun-
Arno Daehnke
try and disappeared into the ether, taking Bitcoin investments worth an estimated R43 billion with them.
“You cannot discount the negative publicity and hype around cryptocurrencies, and there is a view that cryptocurrencies facilitate underworld trade for nefarious purposes,” says Jo. “It does affect perceptions that the blockchain centres on hiding things when the opposite is true. Blockchains are about privacy; they are intended to create immutable records underpinned by proof points. They create places of absolute surety with the fundamental core principle of enabling trust in transactions.”
It’s a question of trust
Since the blockchain is still so new, it will take time to build that trust. Jo adds that banks are trusted because they are assured by a central bank or a legislated body that provides oversight and guarantees, but trust also comes with stability and familiarity. The blockchain will improve many financial and transaction processes through guaranteed data integrity, and having an automated record-keeping and governance function that instantly validates transactions, will make the finance function simpler, faster, and transparent. For the blockchain to gain acceptance beyond Bitcoin, CFOs need to understand what this technology is and what it’s capable of doing. With a distributed ledger, traditional securities can be digitalised, documents like letters of credit can be tokenised, and smart contracts can be automated. This means that new financial instruments will be created and processes like reconciliation, regulatory reporting, transactions, supply chain management, and fraud detection will be in near-real-time and from a single source of truth. “Gaining more trust in the technology comes down to knowledge,” says Tramayne. “CFOs are trained to look backwards; we run an audit for last year’s financials, we report 10 days later to the CEO on the numbers for last month. We need to start looking forward: the distrust is because many of us are not delving deep enough into this technology.” According to Arno Daehnke, chief finance and value management officer at Standard Bank, as more use cases and proof of concepts become available and regulations are tested, trust will be built. It’s just a matter of how quickly this will happen. “Imagine how a postmaster would have reacted if, 30 years ago, you told them that there will be email?” asks Arno. “The blockchain securely sends anything of value from one person to another, similar to how emails are sent. We are used to centralised entities or intermediaries ensuring trust and I think that is where the issue lies – we are not used to trust-
ing transactions that haven’t passed through a central entity.” But how do you, as a CFO, get to grips with the blockchain? “Start with your area of expertise,” advises Tramayne. “If you're a CFO in the manufacturing space then research specific use cases on that, or retail, or distribution. The easiest way to start learning about it is to be open to it, and to be comfortable with the fact that you may not find all the answers immediately because it's still growing.”
CFOs: Time to jump in or wait and see?
The blockchain swell is getting bigger – Deloitte’s 2020 Global Blockchain survey revealed that 55 percent of responding organisations viewed it as a top strategic priority, an increase from 43 percent in 2018. However, many companies are still taking a wait-andsee approach and this is becoming risky. Although the technology is new and scalability is an issue, it’s evolving at a rapid pace. Distributed ledger technology could likely become a cornerstone technology across business processes, and early adopters will have an advantage. Does your average CFO need a blockchain? It depends on whether the benefits of a decentralised, public record secured by proof-of-work outweigh its costs. There are encouraging use cases emerging, and the jury says that taking the time to understand how this technology can reimagine financial processes and instruments is critical.
“Many people don't realise how real blockchain is,” concludes Ian. “At some stage, it might be too late – a bit like when Kodak didn’t recognise the potential of digital images. By 2030, we will see a totally different picture.” l
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CUTTING COSTS TO GROW RETIREMENT SAVINGS
In the wake of an economic crisis that has affected households around South Africa, employers would do well to consider the cost benefits of umbrella funds for their employees.
When a company makes the move from a standalone to an umbrella fund, the board of trustees overseeing its retirement fund is making a decision that will help the households of its employees to be more efficient when saving for retirement – something every employee will welcome in these tough economic times. No CFO or financial manager would have to delve too deeply into the books to know that widespread household income losses due to Covid-19 lockdowns have put South Africa’s retirement planning under pressure, as workers try to deal with the immediate financial impact of the pandemic. At the same time, however, CFOs and the pension fund boards of trustees they likely sit on are in a unique position: while tasked with investing people’s retirement money, they can review the long-term suitability of their current retirement provision arrangements to maximise savings right now. This is according to Malusi Ndlovu, Director of Large Enterprises at Old Mutual Corporate, who says that moving from a standalone to an umbrella retirement fund like the Old Mutual SuperFund can save money for members over a lifetime of investing. “What employers and their retirement fund boards of trustees don’t consider is that the cost of administrating a standalone fund is largely passed on to the people who can least afford it, namely the members,” he says. With the costs of benefits designed to protect members and their families against sickness or death increasing due to the impact of Covid-19, there is even less money available to put towards retirement savings every month.
Impact where it matters – the bottom line
“Well-administered and properly governed umbrella funds are more efficient because of their reduced complexity and economies of scale,” says Malusi. “With a standalone fund, on the other hand, you need an auditor, an actuary, an investment consultant and a host of communication and specialist service providers.” While an umbrella fund needs the same kinds of services, “the umbrella fund creates an advantage of size, meaning that these costs are spread over a larger pool of contributors,” he says. In addition to lower costs for members, the umbrella fund removes the administrative burden on companies needing to appoint a board of company trustees
to meet the onerous governance, risk and compliance requirements, a board most CFOs will find themselves a part of. “While these costs are harder to quantify, they are significant. They include the opportunity cost of time, skill, and other resources needed to run a standalone retirement fund.
“These men and women generally don’t work as full-time trustees, and are not experts on retirement regulation, investing or governance, yet they are expected to accept full responsibility for the retirement savings of their colleagues. “In addition, the raft of continuous changes to retirement fund legislation places a further burden on these workers whose valuable skills and time could be better utilised in running the core business of their employer,” he says.
A win-win situation
Umbrella funds clearly offer numerous advantages for business in terms of both cost and freeing up senior staff to focus on their core tasks, but Malusi emphasises the advantages of umbrella funds for the ultimate focus of any pension fund – the member. With any investment, it is vital that as much of the contribution goes to the savings pool as possible, says Malusi. “At the very least, trustees, employers and employees should be conversing on the merits of moving to an umbrella fund, seeing that the outcome has significant implications for members. “In a very complex arena, it is essential to take a step back and compare the pros and cons of umbrella funds such as the Old Mutual SuperFund with typical standalone funds. This will help management and other stakeholders to make a more informed decision about their financial future,” concludes Malusi.l
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