From Enron to Wirecard: How Blockchain Tech Could Have Helped – CoinDesk

Adam Traidman is CEO of BRD, a cellular cryptocurrency pockets.

If a worldwide firm can efficiently cover billions of {dollars} in a single day, we’ve an issue. If it’s rigorously audited by a number one accounting agency, and controlled by one of the thorough regulatory businesses on the planet, but nonetheless manages to cowl up the disappearance of billions of {dollars}, then we’ve a good greater downside. I’m after all speaking concerning the obtrusive reports that thrust the steadiness sheets of German-based card issuer Wirecard into the highlight in latest weeks – uncovering some ugly truths and a culture of mistruths pertaining to monetary record-keeping.

How may a globally acknowledged firm get away with $2.1 billion price of fraud for thus lengthy? To put it bluntly, it is a case of a largely reliable public-facing enterprise fronting for shrewd cash laundering operations. Hiding in plain sight, because it had been.

The Wirecard scandal highlights how an optically upstanding and regulatory compliant firm can disclose sure strands of knowledge, whereas tactically omitting essential particulars, permitting it to navigate tight regulatory and audit constraints. The fraud appears to have been enabled by an expansive community of subsidiaries, and a convoluted company construction. 

See additionally: New Blockchain Tool Promises Verifiable Audits in 30 Seconds

The 2006 buy of XCOM Bank AG broadened Wirecard’s remit significantly, making it eligible to concern bank cards, whereas additionally dealing with cash on behalf of retailers, a spectrum of exercise that historically blurs the road between non-banking and simple banking operations. 

Between 2011 and 2014, Wirecard started buying a variety of Asian funds firms, additional including layers of complexity to the corporate’s construction and steadiness sheet. The Financial Times honed in on this growth, which continued all through the last decade, pointing to a variety of inconsistencies in Wirecard’s accounts. Some of those subsidiaries had been reportedly processing funds on behalf of the corporate, enabling Wirecard to tactfully assemble a defend for suspicious accounting practices – together with a $2 billion steadiness sheet gap.

Fast ahead to 2020: an investigation by German and Singaporean regulators led authorities to 2 belief accounts within the Philippines, which supposedly held the lacking cash. The auditors, after all, had been unable to seek out the money.

The unraveling of Wirecard’s gross malpractice must be a watershed second, one which initiates a technology-driven change.

The doubtful findings led many to consider the corporate was inflating its worth by means of simulating enterprise with a variety of third social gathering acquirers. A barely divergent idea means that maybe a few of this “business” was reliable, however it wasn’t essentially being performed on behalf of Wirecard, and the cash was by no means held the place it was purported to be.

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Blockchain may have helped

The unraveling of Wirecard’s gross malpractice must be a watershed second, one which initiates a technology-driven change to mitigate the danger of those sorts of scandals. Ideally, each time a agency tries to suppress fund particulars, they need to pop up someplace else, dissuading entities from participating within the alteration of economic data.

Blockchain expertise allows real-time, cross-organizational intelligence sharing that may mitigate the danger of economic crimes flying underneath the radar. This is true additionally in circumstances the place legal networks are geographically distributed, with a number of banks getting used to cover-up illicit exercise, because it was within the Wirecard case.

See additionally: Leah Callon-Butler – Is Crypto Fintech? It Depends Who You Ask

As legal networks develop into more and more subtle, blockchain expertise might be leveraged to assist regulators corroborate proof throughout an expansive ecosystem. Cryptographically-secure instruments resembling personal set intersection – which permit events to match two or extra information units and determine matching components with out revealing any underlying data – can be utilized to assist regulators determine situations of cash laundering and different monetary crime. 

While the Wirecard scandal illustrates the necessity for a better stage of disclosure, notably to regulators, I’m not selling the concept that all the things must be accessible. Companies will all the time want a level of privateness for regulatory or aggressive causes. We can strike the correct steadiness by making main firms accountable for his or her actions, and accomplish that in a extra environment friendly approach than any authorities or regulated physique at the moment can, utilizing blockchain expertise and new cryptographic strategies that assist flag spurious transactions. 

Clearly, within the case of Lehman Brothers, Enron, and now Wirecard, the related regulatory our bodies failed in a really public method and had been left to select up the items. Even although Wirecard was absolutely audited, the corporate’s multi-layered subsidiaries allowed them to muddle monetary data and sidestep regulatory reprimands. At some level, both the auditors weren’t paid sufficient to maintain digging, or they ended up taking data on religion.

When all the things is laid out on a public ledger, irrespective of how deep auditors have to excavate, the knowledge is all the time accessible. With blockchain being deployed throughout the context of a regulated monetary system, we are able to pivot in the direction of extra decentralized and clear cost and accounting methods, sparing future regulatory blushes and dissuading company entities from dishonest the system.

Disclosure

The chief in blockchain information, CoinDesk is a media outlet that strives for the best journalistic requirements and abides by a strict set of editorial policies. CoinDesk is an unbiased working subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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