Two out of three ain’t bad. You have probably heard of the expression crypto currency; Bitcoin is the poster child, and Ether its sibling. ICOs are likely just as familiar; Initial Coin Offerings, which are a a variation on IPOs. What about CCOs? Never heard of them? The extra C is for Collateral; collateralised coin offering. I am advising a client on a really interesting CCO offering, so now seems a good time to offer a view on what might be the new, new thing in the digital space.
An ICO is a means of raising capital. Rather than a traditional prospectus or offering memorandum, it is based on a White Paper, which outlines what the company will do with the proceeds.
This activity is very similar in nature to what happens in the traditional securities & banking world, with the result that regulators are beginning to flex their muscles and draw some lines to weed out bad actors. The SEC has just closed down PlexCorp for fraud; the company was promising monthly returns north of 1’000%.
As far as I can tell, most ICOs are simply asking for money saying they will do A, B or something completely different, without much in the way of a concrete business plan. The rise of the internet and the instantaneous nature of global communication means that it is very easy to spread a message about any ICO and as a result it is more likely you can find somebody, somewhere to give you money. If you invest, you need to be able to lose your money. As the saying goes: not for widows or orphans.
A crypto currency is largely a digital figment of the imagination; an imaginary value is placed on them. My view is that they are the same as art; they may be scarce and they are simply worth what somebody is wiling to pay. In truth, they have the same backing as any government issued currency; none. They both rely on trust. So far at least, officials believe that people have more trust in government than in private companies. At least this was the view offered by a Fed Governor recently on why a crypto currency would not undermine the US dollar. In Venezuela right now, you would be mad to suggest the same rules apply. You gotta have faith; in the former there is some, in the latter there is none.
A digital dollar
The same article cited the Head of the NY Fed as saying the Fed is looking at Crypto currency. This would be really welcome. In my opinion, the Fed and its fellow Central Banks are too slow on the uptake here.
For the CCO project, we will need to collect both fiat and crypto payments from buyers of the CCO. Crypto is easy and we can make it very close to a PvP, Payment vs. Payment process. Very close rather than exactly, because we need to do an FX trade to move from crypto to fiat to buy the underlying asset. Fiat is actually hard and involves some good old fashioned settlement risk for our clients; we have to collect up their subscriptions before we issue the coins. It would be a lot easier if we could accept digital Euro and Swiss Francs.
Actually, there is a digital version of the Euro and the USD; Tether. It is a private offering and claims to be 100% backed by deposits in fiat currency. This is really very much the same as somebody in Kenya giving money to their local mobile phone operator to load an M-Pesa balance on their phone. But, and it is a big but, these Tether coins will not be fungible with any other offerings doing the same thing. Imagine if you could not move the dollars in your account at Citibank to your account at JP Morgan. Add to this, you are moving your trust from banks to a start-up enterprise that is not a bank and does not have all the checks & balances that a bank has. Novel, perhaps even necessary in short-term as a step on a longer journey, but not an answer for the long term and not fit for purpose for the institutional market.
CCO, the Collateralised Coin Offering
This is like an Asset Backed Security. Understanding that you are making a sound investment means knowing a couple of things about the underlying asset; is that asset both liquid and non-volatile? Bitcoin is none of these, and even some of the major ABS products of the past turned out to have a lot more price volatility than anybody envisaged. MBS, Mortgage Backed Securities, offered comfort in in that there was an underlying asset if the payments were not made; as we now know, not all of those mortgages were equally sound.
The second factor is about the transparency of the underlying assets. This is where a certain Bernie Madoff hoodwinked all and sundry. The assets were not there. Now Tether, cited above, may be technically brilliant and it says it has the assets, but it is fatally flawed in a worst case scenario. The only place Tether can keep its $800+ million in assets is at one or more commercial banks. That is a lot of credit risk. Cash assets have very limited protection in a bankruptcy; the 100k or so that might be backed by one or other government depositor insurance schemes will not help much.
Lessons to be Learned
The ideal source of power for transactions in a digital global economy would be CBDM; central bank digital money, with the government acting as transfer agent, providing a 1:1 instant on-demand exchange facility and then locking up the fiat currency at the central bank.
Singapore is getting there with its project UBIN. The banks are trying to fill this void; UBS is leading a consortium developing a Universal Settlement Coin.
Those individual efforts are a necessary stage of the journey; regulators and central banks may well observe from the touchlines and then support the infrastructure with carefully worded regulatory guidance. This has happened in FX, with the BCBS stating in BCBS 241 on FX Settlement Risk that PvP, Payment vs. Payment, is the preferred settlement option. There is only one PvP utility available; CLS.
CCOs have the potential to establish themselves in the same generally positive way that the traditional ABS products did. To do that, they ideally need to be linked to an asset that does not have a volatile price and where the underlying assets are transparent and not subject to further issuer risk.
The CCO I am working on promises to do both those things. Super exciting. More in due course.
About the Author: The Bankers’ Plumber. I help banks and FinTechs master their processing; optimising control, capacity and cost.
If it exists and is not working, I analyse it, design optimised processes and guide the work to get to optimal. If there is a new product or business, I work to identify the target operating model and design the business architecture to deliver those optimal processes and the customer experience.
I am an expert-generalist in FS matters. I understand the full front-to-back and end-to-end impact of what we do in banks. That allows me to build the best processes for my clients; ones that deliver on the three key dimensions of Operations: control, capacity and cost.
Originally published on the 3C Advisory website.
You have probably seen the terms ‘contractor’ and ‘freelancer’. If you’re self employed you’ll likely fall into one of these two categories.
A contractor is a person who provides services to a person or organisation (a client) for a specified and finite period of time. A contractor usually meets the following characteristics:
- Works on one contract at a time for one client
- Does not operate under standard employment, but rather a contract that defines their arrangement with their client for a defined period of time
- Are not on their client’s payroll
- Is set up as a sole trader, a limited company contractor or an umbrella company contractor
- Commonly found in the IT, engineering, public sector, health, education, social work, finance and consulting industries
A contractor’s contract will stipulate their working arrangements, which will determine whether they are genuinely self-employed or temporarily employed under the guise of self-employment. This is referred to as being outside or inside ‘IR35 legislation’.
A freelancer also provides services to a client for a finite period of time. However, this period of time is not always specified. Here are the characteristics of a typical freelancer:
- Might be working on several freelance projects at once for different clients
- May not necessarily operate under a contract the same way as a contractor
- More often works from home or from their own office than the client’s office, because as they are less likely to have stipulated working hours. They are more likely to have to dedicate a certain amount of hours per day or week, but not at specific times
- Similarly to contractors, freelancers aren’t on their client’s payroll
- Will also be set up as either a sole trader, as a limited company director or will be getting paid via an umbrella company
- Commonly found in creative industries such as digital marketing, graphic design, media, publishing, and architecture
Contractors and freelancers aren’t subject to the same employment rights as permanent employees. The term ‘freelancer’ is simply a way to describe the nature of your work; it is not a legal term – therefore a freelancer will still fall under the term of ‘self-employed person’. As such, freelancers will also have to consider their working circumstances to determine if they work inside or outside IR35.
How they get paid
Because freelancers are free to set their own rates per-project and based on how much experience they have, it is more financially beneficial to contract through a limited company as they can open themselves up to more opportunities with clients whilst maximising their take-home pay.
That’s not to say that contractors can’t chase the rates they desire, but more often than not the rates for a contract are already pre-set by the client or the agency. If the contractor is not satisfied with the rate, they can try to negotiate for higher pay.
If your assignment is deemed to be inside IR35, you have some options:
- Continue working through your limited company – you could continue to contract in the public sector through your limited company, and accept the lower take home pay you will receive. You will also no longer be able to claim certain expenses.
- Negotiate a higher rate – adjusting your rate to make up for the loss in take home pay is an option, although an adjustment that your client will agree to might not make up for the loss.
- Switch to umbrella – switching to a compliant umbrella company means you won’t have to pay any Corporation Tax or dividend tax on top of paying income tax and employees NI, and you will receive employee benefits unavailable to you when contracting through a limited company. Find out more about switching to umbrella.
- Leave the public sector – as many contractors have chosen, you also have the option to leave the public sector for the private sector, where these rules to do not apply to the same extent.
Want to join an innovative disruptive start-up that values transparency and trust above everything else?
Message firstname.lastname@example.org asap. Hiring Now.
this is An old article but a reminder of how freelancing needs to build trust into the mix.
Start with a blank sheet and remember that first impressions count.