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Derivatives World comments

Was at the Derivatives World conference in the Renaissance Hotel today.  The food was good and the presentations were really nice.  The people that were attending were all financial intermediaries, but they were different types of financial intermediaries.  From exchanges, to algo traders, to asset managers, to sales and marketing people.  Since I spend most of my time thinking about blockchain and cryptocurrency, it was fascinating to be in a place where no one was talking or much thinking about these things.  The feeling I have is to that of going to a farm in the middle of nowhere, a few years before someone runs a railroad or a freeway through the area.  Things are going to change, and seeing out little blockchain and cryptocurrency was an active area of discussion made me excited because I can see how the technology is going to revolutionize things.

So today was “China Day.”  There was a panel on investments for Chinese looking for investments overseas.  One person made the good point that a lot of the pressure to move capital overseas has to do with the lack of a currency futures market within China.  This is a good point, but I realized that someone could take the USD and CNY bitcoin futures that exist in bitmex and okcoin today, and create a synthetic USDCNY future that is tradeable from within China.

Everyone in the panel was talking about how payments was the big headache.  However, it turns out that the people in the conference were the wrong people to pitch a solution to the headache.  The thing about asset managers is that while they are looking and actually managing money for Mainland Chinese clients, they are legally prohibited from helping their clients move money overseas.  So they don’t.  The client has to figure out how to move the money out, and once the money magically appears across the border, it’s only then that the asset managers can touch it.

There’s also a cost-benefit issue.

A lot of the people at derivatives world are servicing either really, really rich people, big corporations, or institutions.  If you are an individual moving USD 2 million, that’s “small change” and it’s likely that the Chinese government won’t be annoyed if you move the money through unofficial channels.  However, if you are moving USD 10 million or more, you are no longer under the radar, and especially if you are a bank, you have to move the money through official channels.

Conversely, the cost of going through official changes changes a lot once you are dealing with larger sums of money.  If you are just moving USD 2 million, there is a good chance that your request to move money across the border will get ignored.  However, it turns out that if you are a big state-owned enterprise that wants to move USD 30 million to the United States in order to invest in something, the paperwork is the same as moving USD 2 million, and with larger sums and more important actors, it’s likely that you will get the attention of the authorities and they will approval the transfer.

So the reason is that even though payments is a huge problem, the people in the conference aren’t interested in the solutions I have to move money.  Their clients would be, but it would be legal mess for the people involved to even mention that I exist.  So the thing to do is for me to blog loudly.

But there is another use case which bitcoin might be useful……

One of the participants mentioned that they ran into a common problem.  You have a Chinese investor that is trading something overseas on the margin.  They get a margin call.  At that point they have a big headache since they can’t move money very quickly.  All of the standard ways of moving money take about a week, which means that they can’t meet a margin call even if they have the funds in CNY.

Bitcoin is the perfect solution to this problem.  They can hold margin reserve in bitcoin, and use bitcoin futures to hedge the bitcoin.  Since they are already traders, they should know how to do this.  If they need to post margin, then the sell the bitcoin at the exchange.

Now here is where it gets interesting…..

Once you sell the bitcoin at the exchange, then it still takes two to three days to wire the money to the broker.  However, lets suppose that the broker is part of a bank at which the exchange has bank accounts.  The person posting the margin sends the bitcoin to an exchange and sells the bitcoin.  If it turns out that the exchange has accounts in the bank that the broker is works at, then the exchange can very quickly (and possibly within one business day) transfer the proceeds from the exchanges accounts to the brokers margin account, and the person can post the required margin.

Now for this to happen, what you need is an open minded bank which already has accounts for bitcoin brokers, and is willing to work with the brokers.  Note that there are no “real” KYC/AML issues or regulatory issues, since the bank does not touch any of the bitcoin.  You also need a way for someone to explain the process to the traders.  The bank can’t do it because the bank can’t market external services without going through regulatory hell.  The exchanges can mention this, but they need to find the traders.

So at that point you have more blog posts and messages in bottles. 🙂 🙂 🙂

One final thing is that it’s interesting how much of the financial industry looks like people in a dark room running into each other.  Even within the Chinese financial industry, there is a pretty clear split between “traditional finance” which looks a lot like Western traditional banks, and “new internet finance” and the two groups are not talking to each other.  What’s more, few people at the conference were aware of the stuff that was happening in Ukraine or Switzerland.  It’s not that anyone was particularly blind, but it’s because you have a job to do, you are very, very busy doing that job, and that leaves very little time to think about future strategy.  So one thing that I got a strong feeling of is that all of the banks have “digital strategy” or “digital transformation” teams, but those teams are not engaged with the rest of the bank.

So the impression that I have is that one day about three years from now, the banks will be reacting to the new technology in much the same way that Detroit discovered that Japanese cars existed in the early-1970’s.  The “digital strategy” people won’t be surprised, but a lot of other people might be.

One final thing. People in Wall Street tends to be cynical and jaded unlike people in Silicon Valley.  There are so many people talking about the end of the world, and revolution that no one really has time to think about these things. People in Wall Street talk about money rather than ideas, which means that they will ignore until you show that you can make money from something and then everyone listens.

So over the next few months, what my task will be is to put some of the stuff that I’m working on into “making money” mode.


Blockchain challenge

Here is a challenge for all of the blockchains out there.

Two days ago, I signed a share transfer agreement.  I want to post the transfer agreement to a blockchain to register that agreement.

If it takes me more than 30 seconds to do it, it’s not a solution.  If I have to spend more than five minutes installing software, it’s not a solution.  If I have to read more than one paragraph of instructions, it’s not a solution.  If it’s something in which I’m locked into a vendor, it’s not a solution.  If the code involves is not open source, it’s not a solution.

I’m going to the restaurant and I want to buy hamburger, fries, and a cola.  If you hand me raw ground beef and a box of buns, that’s not what I want.  The sad thing about blockchain right now, is that they not only don’t give you a hamburger, they don’t give give you raw ground beef, they don’t give give you a cow.  Right now, most blockchain solutions are giving you pictures of cows and asking you to use your imagination.

The reason I’m making this challenge, is that I don’t want to duplicate work.  I haven’t see any blockchain system that’s anywhere near usable, so I’m having to go out, raise the cow, slaughter it, butcher it, grind the meat, and then make the burger.  Once I do that, I’ll go into the hamburger selling business, but if someone else is already selling burgers, I’ll now waste my time and instead do something else.

So anyone have anything?

More about the problems with fintech regulation

If you look at the people who are talking at the discussion of fintech and innovation, you’ll find that they are the wrong people for the discussion

So you look at the list of names for speakers.  You either have regulators or people who are middle managers for global corporations.  I’m pretty sure that they are very nice, competent middle managers, but if you have to pick a group of people that are the absolute worst group to talk about innovation, it has to be middle managers for global corporations.  The job of a middle manager is to implement the decisions of upper management, and this is as far away from innovation as you can possibly get.

But this points out one of the odd things about the HK bureaucracy and this has to do with the legacy of British colonialism.  The British were very, very clever people that really knew how to run an Empire.  One trick in running an Empire is to make sure that all of the important decisions are done in London.  Once you have the big decisions done in London, then you make sure that you have a skilled civil service all over the world carry them out for King and Country.

Hong Kong is odd because the colonial power structures stayed, but you have a vacuum.  London is gone.  Beijing has much more important things to worry about than running Hong Kong.  HK is not a particularly large city, and its something that Beijing simply does not have the time, effort, or interest to run.  A lot of the thought leadership has come from the business community, but they don’t have much interest or ability to do fintech.

So what you end up with are HK bureaucrats that are simply desperate for someone to tell them what to do.  The idea situation for an HK bureaucrat would be to do what worked with the Disney Corporation.  You bring in a big corporation like Disney, and they tell you want to do, and you can see Hong Kong over the last several years really, really try to bring in a big company to tell the bureaucrats what they should do.

There are several problems:

The first is that if you have someone else tell you what to do, by definition you are not being innovative.  One funny thing about the HK bureaucracy is that they always talk about innovation, but you’ll find that it is absolutely impossible for the bureaucracy to accept or even think about an idea that has not been tried elsewhere.

The second problem is that I can’t think of a single large company that is willing to do what Disney did in the early 2000’s, and put C-level people in charge of an HK operation.  The trouble with working through middle managers is that they really have extremely limited power to get anything done.

Finally, you run into what I call the “Jackie Chan effect.”  It turns out that the major stars of Hong Kong cinema all ended up moving to Hollywood or Shanghai.  This means that if you have a fintech startup that goes anywhere, then it’s going to fly away to somewhere else, meaning that  you don’t end up with the people training the next generation.  One thing to realize is that this is by design.  The British set things up so that if there was someone that was particularly talented (or dangerous) that they’d be pulled over to London.

But I think everything is going to work out.  If you look at the history of Hong Kong, the things that work have never been lead by the government.  The Hong Kong government is out of touch and behind the times, but they’ve *always* been that way.  There’s a ton of cool stuff happening behind the scenes, and I think most of it is going to either surprise or shock the regulators, once they find out about it.

Hong Kong Fintech Regulation

Hong Kong has some of the world’s best fintech regulation, and much of the reason I’m in Hong Kong is that I couldn’t imagine doing what I’m doing anywhere else.  But a lot of my frustration has to do with how the HK government and finance community finds it impossible to communicate how great Hong Kong really is.

So let’s start with the regulators.  Hong Kong has really great regulators, but you have to approach them with a certain way.  First of all, the regulators see themselves as umpires and referees.  They are not leaders.  Second of all, the regulators are extremely efficient and impartial, and are very interested in listening to people, and then trying to balance different interests in Hong Kong.  The main job of the regulators is to protect Hong Kong consumers, because when consumers in Hong Kong get angry, they will protest very loudly, and at that point someone is going to get demoted or lose their jobs.

However, this has a flip side.  Because the regulators are umpires and referees they cannot give you advice as to how to play the game.  Because of the role of regulators, they are passive, and they are completely incapable of anything that involves political leadership.  Because they have no conflict of interests, they can be shockingly unfamiliar with business practices.  Also because they are focused so much on consumer protection, they are extremely, extremely conservative and fearful of new technologies.

What has happened is that there are some standard exemptions which allow a business to operate without strict regulation.  In these areas, the regulators will give a light touch, and these areas are large enough so that you can create huge new businesses in HK:

  • Professional investors – If you are dealing with high net worth individuals or institutions, you are in an area that is unregulated.  There are pages and pages of rules about who is a professional investor, but a lot of it involves common sense, and so if someone looks professional to you, they probably are.
  • Services targeted outside of Hong Kong – The HK regulators are primarily worried about protecting the HK consumer.  They cannot and do not want to be the world’s police, so if you have services that are targeting people outside of Hong Kong, then the HK regulators will not heavily regulate you.
  • Technology services – If you are just doing technology and someone else has the license, then you don’t need a license.
  • Broadcast and media services – It turns out that there is a general exemption for doing broadcast and media services.
  • Cryptocurrency buying and selling – It turns out that you need no licenses in order to buy or sell cryptocurrencies
  • And more – There are about six or seven other categories that will cause you to have low regulation or no regulation.

Also if it turns out that you do fall into a regulated area, it’s not the end of the world.  Licenses for money services and securities companies can be gotten, and there is a market for off-the-shelf companies that you can buy in order to get a license.

If you are focused on other markets, it turns out that the problems that you will have are almost certainly not caused by HK regulation.  The places which become headaches are:

  • other governments – If you are operating out of Hong Kong and targeting clients in the United States, then 95% of your headaches will have to deal with US regulators.  Hong Kong is an afterthought.
  • private regulation – Here is the big problem.  If you start a fintech company in Hong Kong, it is very likely that your headaches won’t come from the HK government.  However, it’s likely that you will have trouble getting a bank account, and that the real regulations that you have to deal with are the bank’s private regulation rather than the HK government

Starting a business is painful.  It turns out that HK has a pro-business, pro-fintech regulatory system, but it has difficulty communicating this.  The reason that is needs to be communicated is that HK desperately needs talent to set up in HK.  The analogy that I like to use is that selling fintech in Hong Kong is like selling machine gun bullets to cavemen that are used to stone spears.  It’s extremely difficult and frustrating, but you have to look a the opportunity.

The people with the stone spears in Hong Kong know that they are backward and are willing to learn.  And after all of that effort, you manage to take a group of stone spear throwing cavemen and teach them to use machine guns, you’ve got an army that you can use to change the world.

Regulation, Innovation, and Hong Kong – What not to talk about.

I went a little crazy when I saw the agenda for this talk

Let me start with a ship that was important in HK history.  The HMS Nemesis was a steam powered engine that the British used against China during the Opium Wars.  I had a great-great-great grandfather that piloted a Chinese ship during those wars, and I always wonder what when through his head when he saw the Nemesis appear out of nowhere.

So right now, I’m seeing fintech equivalents of the Nemesis being built all over the world, and meanwhile in HK we are talking about the best way of building wooden junks that will just get blown out of the water.

So from the talk…..

In this seminar, legal professionals, experts and professionals from the financial institutions, technology providers, consultancy firms and regulatory bodies will discuss and provide insight into how Hong Kong can keep pace with the rest of the world in becoming the Fintech hub, with the development of the special regulatory handling such as sandbox, and special technology to assist in regulatory compliance.

Here is my response…..


I hate to be rude, but I love Hong Kong, and I hate seeing it fall behind everyone else with it comes to fintech. HK is not only behind London, NY, and Singapore, but it is seriously behind second-tier centers like Kyiv, Dublin, Mumbai, Kuala Lumpur, and if this is the approach that the government takes, we are doomed. Its stuff like this that is killing fintech in Hong Kong. In fact Hong Kong has some of the worlds *GREATEST* fintech regulations. As long as you fall into certain categories and as long as you are basically honest, you can do whatever you want. If you deal only with professional investors, target markets outside Hong Kong, you can do anything. The trouble is that the regulators and the financial community have a terrible time communicating this fact. The first thing that you need if you want to promote innovation is to point out the areas where you can get away with no regulation or light regulation, and Hong Kong turns out to be *wonderful* for this. If you start getting into a discussion of the details of regulation, then you’ve killed any innovation. The message that the government should give is if you are doing X, Y, and Z don’t worry about regulation.

Some more talk…..

The agenda is all wrong…..

Let me be blunt about this.  No fintech is going to care about C-RAF and no fintech is going to care about building technology to comply with HK regulations.  The reason for this is that HK itself is just too small of a market, and most financial institutions don’t care that much about HK regulation, because it turns out that HK regulations are almost never the problem.  If you are compliant with US, UK, and EU regulations then HK is an afterthought (ask HSBC), which means that no company is going to design products specifically for Hong Kong.

HK *could* become a tech center for building companies to comply with other regulatory standards, but that involves some structural issues, and it’s not really well suited for that.

But that’s beside the point.  We shouldn’t be talking about the best size of sails in Chinese wooden junks.  We should be talking about how to make HK an attractive place for people that can build steam ships, and that message that HK can send out, and the message that HK should send out is, if you are working on fintech, don’t worry too much about regulation.  Focus on innovation, and as long as you are basically honest and know a few simple rules (i.e. you are basically subject to only light regulation if you are dealing with professional investors, if you not marketing products in HK, or if you are providing technology services), then the regulation will take care of itself.


Rant – Big data and banks just doesn’t make sense

OK.  This is something that doesn’t make sense to me.

On the one hand, you have all of these tech firms selling banks on the idea that they will use big data and cognitive banking to improve the banking experience.  On the other hand, banks killing small accounts and then going crazy with AML/KYC in which they are looking for any excuse to close your account.

These two things don’t make sense at all.

Here’s the problem.  Let’s start with the HK Company Registry.  Let’s go to their website and try to do a search.  You’ll find that you really can’t.  The user interface is designed so that if you know the name of a company, you can pull the records for that company, but they make it pretty much impossible to do any sort of data analysis.

This is intentional.  I’m pretty sure that anyone with a copy of the Company Registry could run some big data stuff on it and find out some very interesting things.  Like who is hiding what money where.  This sort of thing annoys rich people, and so HK sets up the Company Registry to make it impossible to do these sorts of searches.

Now once a rich person figures out that you are doing big data searches on them, how likely is it that they’ll want to deal with you.

What banks really want is something a little more sinister.  They are hoping that by putting everything online they can fire a ton of relationship managers and just have robots do all of the work.  The trouble is that rich people don’t want to deal with robots.  The banks can make poor and middle class people put up with bad service, but they are finding those accounts more difficult to maintain and so are trying to get rid of those accounts.


Blockchain insanity

OK, this is going to be a crazy rant.  I can put up with a large amount of non-sense, but sometimes I just go totally insane.

Blockchain is totally cool technology, but it just drives me insane that so much time and effort is being spent on technologies that are going to go nowhere, and are going to end up with the same broken, rube goldberg-ish, unmaintainable systems that these are trying to replace.  Right now, I’m looking at the IT projects that are being built on blockchain and almost all of them will involve millions of dollars being spent for systems that simply will not work.

What made my go crazy is this link.  It’s in fact a wonderful link about blockchain, but if you look at the diagram, it nicely tells you what is wrong with this blockchain non-sense.

So the first problem is “Find a use case.”  This turns out to be the step where most blockchain systems utterly fail because they are being used to address use cases that are extremely badly thought out.  The trouble is that you have a lot of very deep pocketed companies that are pitching blockchain as a technological solution for problems that are essentially political or cultural.  The big company manager really wants to write a check, pay a consultant and have the problem go away.  The trouble is that because the problem is basically one of business process and politics, the technological solution simply will not fix the problem.

For example, blockchain has been suggested as a mechanism for making payments, syndicated loans, and complex derivative settlement more efficient.  The trouble with that is that there are deep political and business process reasons why these things are inefficient and blockchain or any other technology will not solve any of them.

OK, the next steps involve pulling in the technology and creating API’s and UI’s.  The problem with that is that if you are an application developer, you should be *starting* with a clean API to a backend system.  Right now the situation in blockchain is that you are basically trying to bake bread by starting with growing wheat.

The problem if you start with your own API is that you will end up with something that is totally not interoperable with other systems, and if you don’t have interoperatbility that kills the need for blockchain, and what you will end up with is a system that is *more* complicated and Rube Goldbergish than the one you tried to replace it with.

The approach I took with blockchain was that I came up with some internal use cases.  I haven’t found a single blockchain that comes close to addressing the issues that I have for my coffee trading and small business loan issuance.  I’m very patient, but what really, really annoys me is that people are working on the wrong problems.


  • The basic thing that you need for any sort of trade is the ability to upload documents.  What I want is a single interface where I can take a single PDF file and upload and share it.  I haven’t seen a single blockchain that supports this, and without the ability to upload documents, this makes it totally useless for any sort of trade finance or banking application.  What people are doing (which is totally wrong) is to try to force you to use a schema, and that simply does not work.  It turns out that trade finance is simply too unstructured to be forced into a rigid schema, and efforts that have tried to do this in the past have failed miserably.
  • People keep talking about distributed ledgers, but I haven’t seen a single API that allows you to create something that looks like a database table or spreadsheet and add entries to it.
  • People talk about digital assets, but that’s simply the wrong abstraction.  There are different types of assets that have different characteristics and different distribution models.  You can split up the types of assets into “cash”, “obligations”, and “commodities”.  It turns out that most of the stuff that businesses are interested in fall under “obligations” and if you try to treat obligations as coins, you end up with a mess.
  • No has come up with a sensible access control model.

What annoys me about these issues is no one seems to be working on these issues or even publicly discussing them.  The problem is that everyone wants their blockchain system to win, so there is absolutely no effort at interoperability even at the conceptual level.  Instead, people creating these vertical systems, and in the end, I suspect that people will find that they would have done nothing except to reinvent the systems that people have been trying to get rid of.




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