Wednesday, 22 September 2021

"Bronze in the Digital Age"

By The Asian Banker Live

Emmanuel Daniel, chairman of the Asian Banker, in his keynote address at the Association of Corporate Treasurers Singapore Treasury Forum 2018 on 20 September, compared the critical junctures in the evolution of civilisation that transformed human societies through what are described as the tribal, institutional, market and network phases. In the coming network phase, he argued that corporations with the ability to connect and be open, externalise - leverage external data, personalise and deliver differentiation will survive the transition.

Here is the transcript:  

Emmanuel: So this is how the G8 looked like 3,500 years ago.  Actually it was the G9 if you wanted to be precise.  It was the known world, the civilized world that actually traded with each other.  And the names will be familiar –Mycenaean, the Minoans, the Petides, the Betanis, the Isterians, the Babylonians, and of course the Egyptians.

And by this time the Egyptians were already 3,500 years into their civilization.  That’s longer than everything that’s happened between the time of Jesus Christ and then.  And just as all of us in this room are proud corporations with long histories, jobs that feel comfortable with, skills that you’ve honed over the years, the mind-set of that period was that life was all the same.

If 1,000 years from now we were to examine this period that we’re going through today, archaeologists would probably ask themselves, were America and China actually trading with each other?  Were they actually the largest traders of each other or were they at war with each other?  It’s very difficult to say.

And so it was in that period, all of these communities, they weren’t countries as such, traded with one another, but they were always bickering with each other as well.

And then there came that one year, 1176 BC, that all suddenly came to an end.  And it’s interesting that something can happen over centuries and then end suddenly in that way.  And yet, you can see it coming, you can see the famines, you can see the earthquakes, you can see the problems these communities have with each other and so on.  And then when it comes, it comes in a very interesting way. 

The Egyptians blamed the so-called “sea people” and to this day the stories aren’t agreed on as to what exactly these sea people were really like or where they were from, and what sort of battle occurred to make such a big difference in such a short time.  3,500 years of history finished in 50 years or so.

What was happening in that period was that the world as we know it today, civilization as we know it, was going through a transition from the Bronze Age to what eventually became known as the Iron Age.

Equipment that was definitive in that period around which entire civilizations were organized were to till the land, grow huge agriculture, build huge cities- started to change suddenly.

But this period of transition was very, very interesting because this was the time a number of things happened which defines us today.  The Lydians who, what is called Turkey today, originated the idea of a coin. And before this a lot of transactions that are taking place – and mind you the world is a highly sophisticated trading civilization – all these countries trade just as we do today but the idea of having a token in order to facilitate this trade came just towards the end of the Bronze Age.

And this particular coin you’ll see in the London Museum and also in the new Louvre in Abu Dubai – very interesting.  It’s a combination of gold and silver, and later on when the Romans incorporated the same types of tokens they changed the composition of silver and gold to give the price, the value, and make it possible to pay soldiers and so on – so it’s very interesting.

So the concept of a token.  This is also the period where a number of civilizations came right one after the other and started to shape the structure of society that gives us the stability that we have today.  All of us know that the Greek civilization – the Greeks weren’t one country or one place, they were 160 city states dotted all along the Mediterranean Coast – all of them cantankerous and fighting with each other and this idea of civilization and democracy and Plato and so on, that we seem to think about the Greeks is actually quite an anathema to what actually happened in that period.

Yes there are those that were intellectuals, but most of the time, they were actually fighting with each other.  And the person who gave the Greek civilization its grandeurand its relevance to history actually came from Northern Greece.  It’s almost like if Singapore is the definitive civilisation of Southeast Asia today, the person who eventually made Singapore great is from the North in Malaysia, coming down to make a difference, and that was Philip and then his son, who became known as Alexander the Great.

Macedonians came down and united all of Greece, and what is really interesting, is they internationalized it and created this thing called the Greek empire that took over all of the known world at that time.  In 12 short years a young man at the age of 20 went out to the East and united all of the civilizations that were known at that point in time.

 And how was he able to do that in 12 short years?  We ask ourselves today, how is it that a company called Facebook, or Twitter, or Amazon, can garner 200 million customers or 2.5 billion users in 10 short years?  So it was the same sort of principles that were in operation at that time.

But as soon as Alexander died, as you all know, that Empire that he built became fragmented.  First among his own soldiers and then later on, they went back to the roots of the communities they belonged to.  Then it depended on the Romans coming in and building on that scope of civilization.

And the Romans introduced something that didn’t exist until then.  Until then, a lot of the civilization was communal, was tribal, and was specific to location. The Romans introduced the concept of citizenship to non-Romans and by that they expanded their ability to move their soldiers to other parts, far away from Rome, and create a community and civilization that was able to survive many, many centuries after that. 

There’s another phenomenon happening in that period and that was the rise of religion.  Many of the known religions that eventually became global religions that we know today commence in that period during the Bronze and the Iron Age. 

You have the Chinese religions, Taoism and then Confucianism in the North, which were a little bit more codified, a little bit more structured in order to create harmony, society, and so on.  And this was during the Warring period in China. Religion had a very interesting effect, a theme, which I today actually associate with blockchain.

And the reason I do that is because religion carried a number of concepts that enabled society to interact with each other and created unity and harmony that we now know today.  That actually went beyond racial or social and shared objectives put into a concept, a capsule as it were.

The Indians had a longer religious history.  They had not written it down till about 9th Century BC and then eventually the big epics Mahabharata and the Ramayana were written down.  And by the time we reach 4 BC, the Bhagavad Gita was a massive book written down.  And the Buddhists introduced this concept where you actually create values by storytelling.  And that was something that was missing in the East Asian cultures and then they adopted that and it became even more international than it is today.

The Christians were very interesting, in that the first 300 years of Christianity, there was a lot of different ideas running around.  And in the first 300 years, they were persecuted so much that they didn’t know how these ideas were differing from each other.  Just like today, if you look at how blockchain is evolving, there’s so many variations, so many forkings, so many splitting of ideas in the blockchain world, that we don’t know which one will eventually dominate.

So in the Christian tradition, what happened was there was a meeting in the 300 hundred years after Christ, where in Nicea they got together and said, ‘let’s agree on what the core tenants of this religion should be’.  And then that went on to define that religion. 

But something about their ability to get together to discuss and debate and then come up with agreed forms of thinking continued into Western civilization and became the basis of the university culture, the learning culture, and the civilizations that evolved after that. 

Something else that defined this period was that men were starting to use metals which were an amalgamation of different metals that were available at that time.  Up to this point civilization had been known – rather had been created around just nine different core metals.

 By the time we reach the end of the Bronze Age we were starting to work with amalgamation. So the Bronze Age itself was actually an amalgamation of copper and tin.  And these two metals were actually found in different places and that is what facilitated trade.  And later we started to work on iron, and iron doesn’t occur in its natural form anywhere except in the human body.  So it’s the whole idea of being able to extract iron through the use of coal defined how we were building civilization.

So at the back of our minds, we look at not just how society was coming together but the way in which we structured, the way in which we associated with each other.  The way in which we build armies that were able to move quickly and be able to conquer new territories, had a lot to do with the raw material that was available to us.

There’s one religion that I had not mentioned yet and that was Islam.  That came about 600 years – well at the very end of the Bronze Age.  While all the other religions were structured around the hierarchy of religion, where decision makers sat at the top of the religion, Islam had a far more democratic process.

Christianity, for example, right after the Bronze Age, went into what is called a dark age, where religion was the purview of those who spoke and wrote Latin, and 95% of the population was uneducated and was dependent on the 5% who were.

Whereas in Islam they taught their people to memorize the whole Quran which the Prophet had, and you can become a Muslim just by subscribing to five very basic values.  And if you share those five values, you were one of them.  And that created the ability to be able to export this religion eventually that came to define what we call The Silk Road Gate. 

So when the Chinese are trying to say the Belt and Road is their creation, actually the religion that facilitated the Silk Road were the Muslims.  And, in fact, not just the Silk Road but if you go into the Northern African territories where the deserts are, they also created the Camel Trails.

So they just created the arteries that eventually became the trade routes that we know today.  And that artery depended a lot on trust, on integrity, and community.  So trust that we will not cheat each other.  Integrity that the scales that we use are reliable.  And community in that we belong to the same community regardless of which tribe we belong to right through the Silk Road.

And even this morning, if you go to Beijing and you had breakfast the MianBao, the Youtiao, the Charo, they all find their origins in the Silk Road.  And right down to the West, if you go to Timbuktu, so many of the documentations were traded by the Arab and the Muslim traders in its time.

And then we see the Mongolian Empire.  The world’s largest empire ever known.  The defining principle that enabled these sudden developments, and this happened over a 100 year period or less in the 13th Century, where the Mongolians were able to conquer so much of the world, because, they, like the Muslims carried their traditions lightly and were able to create federations that the Romans had perfected, which comprised of a lot of different people and different communities that were not their own people.

Another development the printing press. Johannes Gutenberg who invented the printing press was an iron smith.  So this was – by the time we got to the 1500s, we’re talking about the impact of iron on human civilization.

Within 50 years of inventing the printing press and writing in the vernacular language of the local community, the Germans in this case, a priest called Martin Luther was able to put 95 Theses on the wall to challenge the Catholic Church as he knew it at that time and create a huge movement that eventually became the Protestant movement and created another fork, as it were, in the Christian Church.

What do you think was the first most popular publications that were disseminated from the origins of the printing press?

The Bible? No, actually it was pornography.  Yes there were very good Bibles printed and actually the Bible tradition actually came from the Muslim tradition of coming up with very beautiful Qurans that used calligraphy and so on. But, ironically, the first use of popular press was to disseminate the lowest possible common denominator in human society which is pornography.

And then came Christianity and then came the sciences.  By the time the journals got printed it was 150 years after the start of the printing press.

And so it was that after the printing press – what the printing press did is similar to what the internet is doing to us.  It changes the way we associate, we learn, and we transmit values, cultures, knowledge, and so on.  And the defining institution after the printing press was the royal society.  Because that was where the scientific community was able to get together and start the process where both chemists and physicists were talking to each other and from then on, we recognized a whole lot of other metals that define us today.

So the airplanes that fly over the skies that you’ve travelled on are made mostly of titanium which did not exist at that point in time.

There is a social scientist called David Ronfeldt who is retired now but he worked for a company called Rand Corporation, which is still around, a think-tank by one of the old aircraft manufacturers.

And in 1992 he came out with this concept which I love very much and I use in my thinking and in my own mapping of how the world is evolving.  He said that the world evolves in 4 phases, tribal, institutional, markets, and networks.  And remember he was writing this in 1992, where we say networks, we’re talking fax machines- the end of the Telex machine, and we had just moved into the fax machine.

And you can see from my description of that divulsion from the Bronze Age into the Iron Age and into society as we know today, there was a lot happening that was tribal and it was the Romans who changed tribal identity of nationhood to a conceptual identity that was institutionalized- the concept of citizenship.  And then the learning that came from the printing press and so on. 

 In finance, we were tribal too.  There are banks in Singapore that are called Overseas Chinese Banking Corporation and United Overseas Bank.  These have a tribal orientation.  And then it becomes institutionalized when you don’t have to be Chinese to be an employee of the bank, or Chinese to be a customer of the bank.  And it becomes regional and global and so on.

I use this concept to think through some of the important developments in finance today.  Think about Libor.  Libor has a tribal origin.  In the streets of London, in Mumbai,where society is like London, where traders got together and trusted each other because they were all English speaking, white, and who were from the same social hierarchy.

And then that becomes institutionalized.  In 1971, the British Bankers Association formalized the idea of Libor, the London interbank market.  When they formalized it, the tribal instincts still continued.  It’s still a community among friends except that it serves a much different function and it grows. 

 As human society evolved all of these phases sort of morphed into each other until we get a world today where we’re actually a combination, an amalgamation of tribal, institutional, markets, and increasingly networks phenomenon interacting with each other, dynamics interacting with each other.

The problem, though, is when you’re making the transition from one phase to another.  So in 1971 when the British Bankers Association set up the Libor infrastructure, the idea was to come up with a benchmark rate for 3-month bank loans, and to guide the cartel, as it were, in its lending practices at that time.

In the year 2010 when the Libor crisis hit, when the British Banks were being fined and the reports were coming out saying that there was collusion and so on, an event will happen in London on a Thursday evening, and on a Friday morning, I will be called by Bloomberg or here in Singapore to provide what is called a soundbite, which is when they want to keep talking about the news last night until London opens again.  So they will call someone in Singapore, Hong Kong, and then India, then the Middle East, then back to Europe and London through the whole day. That’s how 24 hour news channels keep topics alive.

And I was asked, “What do you make of this five trillion dollar market?” And I would say “What five trillion dollar market?” The Libor rate setters do not owe a duty of care to the traders.  And that had to be established first, if you read through the literature that is now available in all that has happened. 

In 2008, when the Wall Street Journal first published the idea that there was collusion taking place in the marketplace, the regulators in the UK didn’t pay attention to what was going on.  So they didn’t pay attention to what was going on until they received an email from Timothy Geithner.  And they didn’t think it was important because the practices, the social norms in terms of how the tribal, the communal aspect and the institutional aspect were morphing into each other, was not defined.

And that’s why when you see a lot of the emails that were going on between the traders and the rate setters, they were informal, they were playful, they were like ‘life is normal’ and they didn’t understand that they had entered a different phase and a different set of responsibilities.

And it took them seven years to make one prosecution and 60 million pounds to get one prosecution, which is today now gone back to the courts because it’s considered unsafe.

And the point of looking at it this way is for us to understand that you’re going to have this similar sort of disconsolance between one phase and another in the financial markets, in the history that we know, as we move from the markets phenomena to the networks phenomena.

Another way to understand this transition from one phenomena to another is to look at your own institutions.  If the banks here have a Chinese origin, tribal, and then it gets institutionalized, some of the stories get carried to the balance sheet.  In the institutionalized format, the bank’s business is essentially assets and liability. In the markets format, and this happened for a lot of the global banks, the balance sheet changes.

60% to 70% of the profits are generated from the trading book and it becomes less of an institutionalized business and more of a markets business.

And some of you here work for multinationals who are the same.  You actually make more money from your trading book than your core business.  So you’ve actually moved – evolved– into a markets dimension.  And so as an animal, you’re a different animal than you were when you were basically an asset-liability book, basic business carrying inventory.

 And all of this is going to change again when we go into the network phase of the industry. And David Rumfeld’s conceptualization carried different characteristics of each of these phases.  It’s not just that tribal means communal. But there were certain defining elements in each of these phases.  But I just want to touch on one of them which is the risks that define each of these elements.

In tribal, the big crime is nepotism.  A father appointing his son as the chairman because he thinks he’s the smartest guy in the world because it’s his son.  Right?

Corruption in the institution.  Meaning you get paid a salary, but you get a benefit that goes beyond your paygrade.

Markets, the crime is different.  It’s exploitation. Traders, some of you are traders, you look for opportunities that come out of another person’s weakness. Opportunity, exploit.  Opportunity, exploit. 

When we finally get into the networks phase we’re going to see a different type of crime- its called deception, and I like this crime very much.  Because in deception, all of us can relate to each other as if we all agree and know what the nature of the trade is, but none of us need to know each other’s intention.  And the crime is in the intention- its in the mens rea, not the actus rea.

And when we get into the dimension, the nature of responsibility towards each other, the nature of the agreement, the nature of the fraud starts to change.  And we would not recognize it until the first crime is detected.  And so that is why you needed to understand the development of a crime like Libor through its different phases in the evolution of the industry as we know it.

The finance industry is pretty bad about making these transitions.  A lot of what the Bank for International Settlements is focused on today is the institutional fault of the industry.  Where for every new activity in finance they pour a capital charge.  It’s like you may be a traditional bank, capital charge.  You’re an asset manager, capital charge.  You’re a trading house, capital charge.  That’s trying to protect the institutional part of the business, but not understanding what the elements of the markets part of the business supposed to be, and guess what?  We’re now moving into the network phase of civilization itself and the banking regulator is not there.

I use the same concept to explain a little bit about how Singapore thinks through innovation.  When Singapore thinks about innovation, it tries to protect the institutional phase of this industry’s development.  So when you take something like FasterPay for example, the real story of FasterPay was the dichotomy between the MAS approach towards payments, and what has now become the technology people in the government’s idea of payment. 

There was a dichotomy because the MAS wanted to believe, wanted to ensure, that all payments originated with banks.  There is no Singapore equivalent of open banking as they have in the UK, or PSD2 as they have in Europe. 

 In fact some countries that don’t have this, like Hong Kong and South Africa, have pledged allegiance to open banking, but in Singapore, we still want the industry to be bank-centric.  We are protecting the traditional institution instead of moving along with the phenomenon that the subsequent phases in evolution dictates that we should.

So I want to start to crystalize this whole evolution into your institutions, the businesses that you operate.  When we talk about the networked world, we all start with a lot of misconceptions and we all start with our own little ideas about what the networked world is. 

Let me start by saying what the networked world is not.  The networked world is not technology.  And since you traders know this- because just in the last six years we found that high-frequency trading was supposed to change the world, was supposed to create winners and losers, was supposed to make huge businesses around companies that were able to trade in the seconds or even create lines that go straight from Washington DC to Chicago. 

 And those exact institutions are flaming now because the profit pool in high frequency trading has collapsed, from about seven billion dollars to one billion dollars right now.  So there’s a lot of consolidation taking place even as the technology is being made available to larger and larger types of users, some of them working from home.

 So you don’t need to be an institution anymore to benefit from technology.  In fact, technology destroys institutions.

The other thing that the networked world is not, is, it’s not product.   All of us remember Kodak.  This could have been a Kodak meeting. Where in the month that Kodak invented the digital film that was in 1991, it launched the professional digital camera system.  We all made the decision to continue selling the 35 mm film. 

And Kodak continued to succeed and the share prices kept going up for another nine years before it started falling.  Product destroys you.  And there are many, many banks and companies today.  There are many, many banks and companies that think that the whole idea of a business in the networked world is to probe out as many core products as possible.

Products means inventory.  Product means cost.  Product means sales cost.  Product means distribution.  Product can kill your business. 

 The networked world is not about cost, because the same cost advantages that you think you get is given to your competitor and eventually it’s a race to the bottom.  And possibly will kill you.

And neither is the networked world about the balance sheet.  Some of you here are treasurers and some of you here are finance managers.  You think that there’s something in your balance sheet that needs to pop up, that makes a difference in the kind of business that you’re in.  But you’ll not find an answer.

So what is the networked world?  The network world is three very important things.  And just like the Egyptians for 3,500 years had thought the world would be more of the same for the next 3,500 years, and it just disappeared within 50 years, many of you will be companies that won’t be around in the next 10 years.

The networked world is the end of the corporation as we know it.   What is the substantive proof that this is happening?  Vast miniaturization.  Those of you who look at your cost sheet or your balance sheet and say ‘how am I able to manage the cost structure of my business when the other businesses are doing cheaper outside?’  Just think of this and there is a Professor that explained it this way:

Imagine the Singapore National Day Parade, if I was a newspaper and I hired 20 photographers to go out there and take photographs, they are my employees, and they will take as many photographs as 20 photographers.

But if I create a website or a platform and introduced and invited everyone who attended the parade to put up the photographs, I get access to a million photographs which I otherwise would not be able to get access to. And the best photograph might be the one photograph that was sent in by an anonymous person. 

In other words, the incremental value to your business may actually come from outside your business, and you’re not going to benefit from it unless you absorb it from the outside coming in.

Another phenomenon that is changing the networked world is open source.  Whenever I hear a large company say that they’ve opened yet another coding centre in India employing 2,000 employees, my first reaction is, ‘whatever for?’

You need just the five who can ace the competition on the thinking of the coding, because there are 20 million coders out there who are sharing data, who are creating structure, solutions, platforms, applications that you can benefit from, and if you think that open source is anti-enterprise because it’s not safe, all of that structure is being put in place already.

I like this picture of Linus Torvalds because he’s calling the bluff on all of us.  He’s the most unfriendly person you can think of.  And all of the coding for this thing called Linux, which he originated, is managed out of that one bedroom.

And personalization. We all think that the biggest challenge of business today is to do what Amazon does, which is on-board customers at the lowest available cost.  Or Google.  It costs them almost nothing to on-board their customers and they can do whatever they want.  That’s platform. 

And so what happens is that all of us build internet sites and try to on-board customers as quickly as possible.  Right now, today, as I speak to you, that agenda is moving on to its next phase and I call it personalization.

The customer is now taking data back from your hands and taking control of it and interacting with each other outside your institution. And so web science, apps, and so on, they are becoming increasingly ephemeral- they’re not important in terms of their relevance to keeping the enterprise going. 

And when I think about a lot of the startups that proliferate and the conversations that you are having with startups, I say that startups are not a technology phenomenon, they are a funding phenomenon. Just think of the conversation.  You are the CIO of a large corporation, a startup comes to see you.  You are paid something between $12,000 and $30,000 a month. 

The startup’s founder, genius guys, he’s paid nothing.  He’s been funded by $2 million worth of startup funding.  And you are trying to keep your costs down so you on-board technology that you should have been originating yourself but it cost you far more because that’s what you are paid.  And you are actually absorbing the funding of the startup’s funds.

 And in most cases, 90% of startup culture, I call it, actually my friend said this,and I’ll never forget, it’s just drama and lipstick on pigs, meaning all of us can be coders.  All of us can have a business idea of something that needed to be changed and go out there and open an application. 

And we are way past that phenomenon now, for most of it.  I’m not saying that there aren’t a lot of startups that are making a change in the world.  There are startups in the frontier of their development.  Infrastructure pays today in AI, in data analytics, there are startups we have to pay attention too.

But the startups I particularly like hearing from are those that are not interested in you as a customer because they are your competitors.  They are the Greeks who will take over the world.  They are Alexander the Great.

This end of the corporation as we know it requires a certain theme from us.  A certain response from it.  And this is the difficult part I always have a problem communicating to corporates.  Which is that you need to externalize your business.  And corporations say, of course we are externalizing our business.  We’ve got a website.  We’re talking to our customers.  We’re collecting a lot of data. 

Externalizing your business means that the data that exists outside your corporation is far more valuable than the data that exists inside your corporation.  The days in which the data that exists inside your corporation is worth protecting are fast becoming over.  The data that you have inside your corporation is historical.  It’s about you.  It’s not about the world that you need to understand.

And I’m not talking big data.  And you’ll notice I haven’t used cliché phrases very much in this presentation.  And that’s because there’s a lot in that data, that transaction, that community, that interaction that’s taking place outside your organization that has got nothing to do with who you are.  And you’ve got to figure out how you can plug in to that ecosystem.

 And this is seen especially in the way in which large corporations think about APIs.  Microsoft is good because they plug in to open source and they bought over GitHub because they just wanted to plug in to where the freelancers and the joy riders and just the open community was interacting and saying to them ‘come in and help us build our products ourselves’.

 So there are companies that are doing that and doing it well and this is not a plug for Microsoft because many other companies are doing this as well.  Instead what I find in Singapore is that companies and banks are very proud.  We have got 50 of our corporate APIs prequalified working with us on themes.

No your API has to be developed by an 11-year-old girl who’s sitting next to the mother designing her first game set on her phone.  Your API should be developed by your condominium managers who today still operate collecting cheques when we should have gone digital by today.

Your API should be done by groups of people having fun with each other and saying ‘how do we organize ourselves and how do we connect back into an institution that can help us?’

And from there, we find that a lot of what you see on your balance sheet today starts looking very different.  I spoke to the founders of TransferWise.  And they were saying to me that from day one, they never had liquidity problems.  They do $10 million a month right now in FX payments.  There’s not a single day that they have liquidity problems because all of their liquidity is out there for the customer to see.  And while you are sitting on Nostro accounts and Vostro accounts and capital charges and so on, there is a new world developing in the networked world where liquidity and the balance sheet is walking around with your customers.

And the network phase is about personalization not institutionalization.  So when we think about things like identity, management, it’s not that you validate the identity, it’s that the customer validates his identity for himself.  And he validates his identity with all those he wants to validate it with.  And disintermediation, because when your customers are talking to each other, they don’t need to talk to you.

So there’s this thing going around called blockchain.  Like I said, religion was probably one of the first blockchain ideas in the world that pulls us together, that creates community.  

There are two blockchain conversations taking place today.  If you went to any of the geek blockchain community, the conversation you’ll here will be very different from the blockchain communities that the banks – and I know there are banks here.  And I am from The Asian Banker- I make my living out of these banks.  I make my living telling these banks that they must do the right thing.

 So the blockchain that is changing the world is the one where young people are falling over themselves to try to figure out ‘how do you build on the original idea of cryptocurrency?’.  Remember the coin, the Lycians when they first started tokenizing trade?

 Well today we’re organizing interactions.  And they’re asking themselves ‘how much data should they collect?’ What if one group of people want to transact far more data than another group of people, can we form another subsect or religion and so on?

And this phenomenon will keep growing until it takes a life of its own and it’s going to leave all of you behind.  The way in which Constantinople became Christian was not that he had a vision.  The real reason is because his mother was Christian.  His sister became Christian.  His maid was Christian.  His personal body guard was Christian, and he was like ‘this is getting scary’.  And then he formalized the acceptance of the religion.

And in this same way, a lot of these developments are going to grow around you and take a life of its own that will define you until you’re not able to resist it. 

The way in which the bankers are thinking about blockchain, something very interesting is going to happen- its going to be blockchain killed by compliance.

You think that the compliance department is going to allow you, to allow a transaction where the identities of the participants are not pre-verified?  You think that the compliance department is going to allow a $100 million dollar trade flow to place without them having a look at it?  No they’re not.

 And I’ve looked at every single press release of blockchain initiatives from around the world and all of them having nothing to do with blockchain. All of them are nothing more than- well the most respectful thing you can say is it’s a shared ledger.

Which is a natural transition from the days of the data boom.  We’re coming to a world where the world wide web as we know it, and I had the pleasure of meeting the person who actually wrote the code for the world wide web, Sir Tim Berners-Lee, simple man.  A simple protocol.  And to this day he must be kicking himself because all of the billionaires that created Amazon and Google and all that on top of that little protocol that he did that allowed file transfer.

The big thing about the bitcoin value that went up to 19,000 last year was not that bitcoin was worth 19,000.  I collect bitcoin and I think there’s something happening there.  The big thing is that there were 2,000 cryptocurrencies by then.  The big thing is that you can be an owner of a cryptocurrency yourself, an originator yourself.

And they’re coming to a world where the protocol does not exist outside your ecosystem, the protocol exists in your hand like the mobile phone. You decide the community that you create.  You decide who you want to validate or not validate in a transaction.

So imagine a world where anyone of you who needs to make a payment just sends out a message and anybody in this room who wants to respond can respond and all of the elements required to make that payment, from identity to credit quality for that person, to liquidity, to transaction occurs between individuals.

I’m not saying that that world is going to come tomorrow or the day after.  I’m saying that we need a road map to know and decide for ourselves that that’s the world we are heading towards despite ourselves.  And every decision you make in a corporation has to take you to that world.

All these ideas are in a book I will be publishing in January so you’re like a precursor to this. 

But it’s a book that I hope will help us think through this journey that we are all on.  I would like to phrase it in a way that those of you who are in finance would remember this phrase before, ‘how do you go bankrupt?’, asked one fellow.  And the answer was, ‘two ways, gradually then suddenly’. So gradually in that we see it coming.  Suddenly that the day will come. Thank you.

Host: Can you give an example of a true disruptor?

Emmanuel: Yeah so I want to answer two questions with that.  So you have the peer-to-peer players as true disruptors. They were not asking for permission- that’s one true disruptor.  In the Southeast Asian context I would say that Grab is a potential true disruptor because what basis is there? 140 million customers in 14 countries around the Southeast Asian space already.  And here you are you’ve got the regulators, the central banks of all different countries, meeting every six months for the last five years trying to set up a regional payment network.

And here you have a platform that already built that for them.  So the peer-to-peer players funnily enough, and I want to make this comment, is they had a false start.  Because I’m now seeing some of them in China and the UK and so on and they started by being disruptors because the borrowing and lending is between an individual and an individual, and you don’t need the bank. And it doesn’t even carry the balance sheet itself, right?

But that agenda has changed somewhat because a lot of the peer to peer players, it became too easy to become a peer-to-peer player.  A lot of fraud was taking place. The regulators had to come in and clamp down on them.  And they, themselves, have started saying they want to be like banks.

So that space will evolve. And so the error in the peer-to-peer disruptor is that it’s a false start, but the idea is still there, and it will start again and morph into a new format as personalization becomes more available.

Now as for the Grab disruptor model, Grab is all ready – I mentioned Grab but in China, on my phone, I have both Alipay and WeChat.  Not a single day do I need to carry money.  I promise you this.  I use it for everything from shopping to paying a beggar, literally.  And I’ve seen beggars having QR codes. 

 So they’re the ones pushing the frontier.  And my conversation with a Chinese regulator society in like 2013, 2014. One year had passed since Alipay had started and it had already been doing a few billion dollars, maybe $20 billion at that time.  And I was having lunch with the regulators and they were saying ‘how do you manage a non-bank payment platform?’

You know that Alipay exists, why are you asking me this question today? And basically I said ‘what about the concept of a non-bank payment entity, or a deposit taking company?’ And they said ‘oh tell us more’ and stuff like that.  So that was very interesting – so here was a case of a disruptor who had created a market for themselves while the regulator was not watching.  And they could do that in China because it starts from the provinces and it’s not a national platform.  And then it becomes too big and they have to manage it themselves.

So Grab was going to be that for Southeast Asia but the regulators were there faster.  So now the regulators are saying ‘you need to fulfill the following principles’.  You need to have money originated from a bank account because of KYC and so on.  And so they’re trying to make a disruptor back into a traditional institution.  But that war is not over yet, that’s what a disruptor does.

Emmanuel: Well all established businesses try to absorb rule changes but the rules keep changing on them.  So in the same way that a traditional bank today pretends that it is innovative and that it is absorbing the network technology, it is digital and they love getting awards because of the digital bank and all that stuff.

Emmanuel: The Googles of the world, the Microsofts of the world are trying to keep that, but there is something to be learnt from Google and Microsoft buying into Git etc. It’s that as they internalize these developments, we need to figure out how much of their traditional way of looking at businesses are changing.  So Tim Berners Lee said to me, the problem with these platforms, Google and so on, is that they actually fragment data, they don’t unify it. 

The funny thing about the World Wide Web is that it’s supposed to liberate data- it actually creates silos rather than break silos.

Emmanuel: So while they buy into Git, what you don’t want them to do is create a siloed community from them.  That’s not what’s supposed to happen.


Categories: Financial Technology, Risk and Regulation
Keywords: Disruptors, Blockchain, Risk Regulation, Data, Technology
Institutions: Rand Corporation, Overseas Chinese Banking Corporation, United Overseas Bank, British Bankers Association, Bloomberg, Bank For International Settlements, FasterPay, MAS, Kodak, Google, Amazon, Microsoft, GitHub, TransferWise, Grab, Alipay, WeChat, KYC, Git, Wall Street Journal
Region: Asia Pacific
Guest: Emmanuel Daniel
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