How a Big Four accounting firm is using blockchain technology | Interview with KPMG partner

Foreign.

Hi everyone, it's Giovanni here from Web Summit 2021. Today I have the pleasure to be joined by Alex Correa, partner at KPMG Portugal. I want to start talking about the approach that KPMG has towards cryptocurrency and the blockchain. So the booming cryptocurrency and blockchain space, how is that impacting the operations of kpmg? How is KPMG reacting to this developing space?

Okay, so around the blockchain as a technology and also all the crypto market for kpmg, it's a very challenging opportunity to develop new solutions and new offerings to our clients. So as a full suite, one stop shop for professional services and consulting, we can actually provide services end to end from startups. We need funding from the technology part, from strategic plans and then at the end of the day even accounting services. You know, if someone puts some bitcoin on their balance sheet, how will they account that? How will that be valued throughout the year, how will that be taxed? How can they move the money around? So all this is the kind of services that we can provide as KPMG. And with the presence of more than 150 countries, 200,000 employees, we have the local expertise that can be leveraged especially for multicultural and multinational organizations.

And so like in the last year or so, did you notice an increase in terms of requests from your clients to access your services, your specific blockchain related services?

Yeah, so as a distributed company, we have different expertise in different areas. Right. So we have a very big practice in the US around digital ledger. So blockchain technologies. We've been doing some projects for, for private blockchains, especially with our alliance partners like Microsoft or IBM. And there are a lot of use cases where it makes sense to leverage that blockchain technology and digital ledger for some cases. One example, credit registry for banks, it's something that is shared across banks and with the regulator. It's not public, but it's something that can be deployed on the blockchain. If you are talking about public, then it's a bit different. Right. Everybody can look at the chain. So there are specific initiatives. And full disclaimer, I speak overall as kpmg, but I won't discuss specific projects where we worked. But for instance, Ethiopian government is deploying national IDs on top of Cardano blockchain, which for me is quite interesting initiative to have public civil servant use of the blockchain technology. So those are the kinds of use cases that for us are important and Propose opportunities of business development. Talking about the Tesla that we discussed before, when the Tesla in February announced that they bought $1.5 billion of Bitcoin, there are a lot of questions that you can make, right? So how did they do it? How do you go around? You just install an app and buy. You cannot do that, right. So the overall process of actually doing that, custodian accounting, that part, how to tax, how to account for the swings in price, how do you do that? And that's the kind of issue that KPMG can help locally the company. Another one is related with remittances. Right. So with blockchain and crypto technology, you can easily send, you know, $1 billion from the US to South Africa, then to Russia. How do you account that from the tax perspective? And this, all this knowledge and expertise that we bring in from the several KPMGs around the world to deliver solutions to our cloud.

That's interesting. So of course KPMG is dealing with institutions, big corporations, big companies, banks. So how do you see this pro, this process of institutionalization of digital assets? At what point are we at the moment and what are the challenges that still are barriers for institutions to get into the space?

Yeah, institutions. One issue I think is currently undergoing is around regulation, right? So different governments, different countries are looking at regulation on how to handle this innovation. Right. And from that perspective, of course the corporations and institutions have to be a bit cautious on the level of risk they will. For instance, just to reference once again public information, there was a big hash rate being mined for bitcoin in China. More than 50%. Right. Currently there is zero. Why there was a ban in crypto in China. China is promoting their CBDCs. And basically what happened was the hash rate dropped and then started to show up in different countries like Kazakhstan, Russia, Ukraine and a lot in the US currently US is number one with 35% of the market in ashrate. And the market evolves around also this regulation. KPMG can also help on this part. Looking at the. Because we work a lot around risk consulting and the regulators to show the clients the opportunities, pros and cons with different situation and how can they move around. Very specific, for instance in regulation we are having ETP so exchange traded products around crypto in Europe for quite some time. Switzerland even have some cantons that accept taxes being paid in bitcoin. But in October, just last month, it was the first ETF released in the U.S. right. So we already had something like three or four in Toronto, in Canada and we just Released the first etf. The SEC authorized the first ETF at Nasdaq. And it was, you know, quite a milestone, I would say, at least for the regulation in the U.S. i think even this week it came out a report from Biden government around stablecoins. So this is kind of the information that feeds back the loop into the industry so that the industry can know how to adapt. Because and this is a very important message, the industry wants to be legal, right. So they want to comply. But it's important to have a clear vision on what is what. Right. And interesting. For instance, in the US there is a bit of turf war between the SEC and CFTC around is crypto a commodity or is crypto a security? And this discussion is not clear. Right. So I think it's important to have sort of benchmark around the world to make more, more light into the industry.

The regulatory question is definitely important. So would you say that this is the only obstacle that is preventing institutionalization cryptocurrency? So basically you're saying that the interest is there. These big corporations and institutions want to get into the space, but they still see it as a bit too much of a gray area sometimes and they are afraid of risks. But in terms of technology, everything is already in place to attract these actors.

I wouldn't say that. So I would say it's not only regulation is the value proposition. Right. So you take into account the regulation as one of the risks. Okay. You of course you have to comply, but also the value of it, why would you do it? Right. And for that different initiatives can, can come on showing why this is. And this is not financial advice, of course, but from the portfolio perspective, it makes sense to have some investment, I would say in crypto to better understand the technology and educate yourself, do your own research and try to understand how to move slowly into this space. On the crypto side, on the blockchain, I would say that the technology is quite good. The enterprise providers of blockchain technology are known like Microsoft or IBM. So it's easy to piggyback. You just have to find the correct use cases to use it.

So we see that, as you said, regulation is different depending on the geographic area we're talking about. Maybe you can point out that a specific regulatory framework somewhere around the world that is particularly effective in order to facilitate, in order to harmonize the institutionalization of cryptocurrency that maybe could serve as an example for other also jurisdictions.

Yeah. So here you really have extremes, Right. So if you think of China, crypto banned only CBDCs. If you think of El Salvador, Bitcoin is now legal tender and in the middle there is a lot of regulation different. India is pushing some new regulation at least until the end of the year. The US already touched on this. They are still figuring out if it's commodity or more security and the best things to do. For instance, one of the SEC commissioners, Hester Spears has proposed sort of walled garden safe harbor approach where the crypto innovation could flourish, but with legal boundaries on what they could and not do, but do not have right away all the regulatory burden on top of them. This was something that we also did here in Portugal. So our digital transition Secretary of State Andreas Verdu has presented here at the web summit we call Zondes lievre de Tecnologier or technology free zones where you can foster and do experimentation in the field to better understand how will the blockchain and crypto affect in the long run. Because for instance the experience in El Salvador, no one knows how will that come, you know, because they are trying that live currently with the population of one country. Right. And these three technology zones that we implemented here in Portugal, you might find them in Singapore, you might find them in Switzerland, really make a difference. And I think it's something that for sure us will probably adopt in the near future.

That's interesting the comparison that you made between El Salvador and what is going here in Portugal. So would you say that the, the experiment of El Salvador is, I mean, is a risky one because in case the implementation of all this bitcoin strategy doesn't go as planned, it could cause massive stress to the country's economy. While in the case you mentioned, it's more like about creating some sort of tax test zones where the damage is minimized.

Yes, definitely there are some safeguards in El Salvador. You know, you can pay crypto and then convert right away to US dollars. But nevertheless it's a first time experience. No one has done it before and they are doing it with the full country. Right. So the idea here is to safeguard an area where you can actually implement, try out your innovation and move forward to then also in the other point of view, to also help the regulation because regulators will look at this innovation agencies, regulators and see, oh, this works, this doesn't work. And they will put that, then propose that as laws to better foster that innovation.

That's an interesting point of view because the pace of innovation sometimes is so fast that regulation cannot just keep up with it. So what could be a solution for regulators and innovators to kind of find a balance and find the right pace to move forward together.

I like to use the analogy of tolling a car with elastic. That innovation is going forward very fast and it stretches the elastic and then sometimes then the regulation catches up with the other car. So if you think about it, it's very hard to make regulation for something that you don't know. It's not like you have a crystal ball to know the future. So I think the safe harbor approach that U.S. is proposing, or zoners livres, the tecnologia, as we have here in Portugal, free tech zones, it's not a silver bullet to fix everything, but it's a very good approach to free the innovators to flourish and allow also the regulators to then adapt the laws as they see the experiments in the field. So I think that's one of the solutions. The other one is also work a lot with academia. So universities, some of the blockchain initiatives and crypto initiatives have sort of ecosystems working with local universities. Here in Portugal, for instance, Instituto Superior Technic, which is our premium engineering school, just hired a crypto lady from Imperial College, and they are focused. They will release next Monday a crypto lab where experimentation can be done, innovation can foster and then move that from the lab to actually people and geographies that can be walled garden and protected, but can be tested in the real world. A lot of things are tested as we speak.