October 31, 2018
Fraud Miniseries Part 4
A Whole New World
Gary Fan, founder of blockchain-based payment platform Ivy, joins the podcast to talk about how fraud is being addressed now and into the future through emerging technologies.


Welcome back to the Finance Frontier. I’m your host, Eric Hathaway. Today we’re going to be speaking with Gary Fan. Gary Fan is the president of Ivy, a blockchain base technology company focused on developing new FinTech and RegTech for the financial services industry. Previously, he led the consumer lending business unit of CTBC Bank. We are going to speak about the future of fraud, and how companies are addressing fraud. Gary and I are gonna talk a little bit about how blockchain specifically is being used to address fraud. So again, welcome, Gary.
Gary: Yeah, thanks so much for having me, Eric. I know we met a few months ago, and really, thank you for the opportunity to come and chat with you on this topic.


Absolutely. You know, when I ran into you at the FinXTech Conference, and we had a conversation about your company Ivy and what you’re doing … It got me thinking about the innovative technology that is emerging, and not just to combat fraud today, but guard against it in the future. Just to give our listeners a little background on Ivy, you’ve developed a payments token that allows you to attach specific pieces of data to a payment, to allow financial institutions to do a better job sniffing out money laundering, and complying with KYC and KYT requirements.


So, I started thinking about how using blockchain to address fraud is very much a forward-looking way to address this problem. Not just stopping fraud and complying with regulations, but building a network that is intended to be more cyber crime resistant. McAfee just put out a report that estimates that cyber crime is currently costing the global economy nearly $600 billion, which is .08% of the global GDP. So, it’s not a small problem we’re all trying to address. The potential here is huge.


So Gary, if you could give us a little insight into number one, the kinds of fraud that you’re seeing, how you came to build the business around what you’re doing, and how you’re using blockchain to address fraud now, and into the future.



Fraud obviously is something that our society has had to combat, and it hasn’t been easy. Specifically in financial services, and specifically where we play, money laundering is the type of fraud that’s rampant. According to the United Nations, I think around two to five percent of worldwide GDP is laundered every year, which equates somewhere between one to two trillion dollars every year. You know, the reality is that banks worldwide have spent significant resources to try to combat this. I think the general statistic is somewhere around eight billion dollars annually, on AML compliance. AML is anti-money laundering. The results are that they’re only catching a very small, negligible portion of that activity. Some experts have pegged that number to less than one percent of the total activity.


So at our company, we’re trying to use blockchain, and blockchain where you have a record that is stored on a distributed ledger that can be tracked. We believe that this would create an additional source, that provides a very powerful data source, that can be used to improve the ability for money launderers to be caught. There’s obviously other technologies, like artificial intelligence and machine learning, that can also be used in line with blockchain as well, that can be used to combat this problem.
Eric: Yeah. I want to jump in here, because you mentioned these other technologies that have been considered emerging technologies. But honestly, at this point, they’re actually considered staples by a lot of banks. I think it was McKinsey who just said that one in five financial firms have implemented some sort of AI system to fight crime.


Yeah. You know, in the end, it’s all about data, and I think blockchain allows for data to be stored in a chronological order that is immutable, and that creates a record that can be trusted, or at least more trusted than the systems in place today. blockchains and other technologies like that can have an improvement on what we’re looking at, as far as trying to create a solution for anti-money laundering fraud. But I want to caution everyone that it doesn’t mean that this is the ultimate solution. I think this is the next iteration, and it’s an improvement on the systems that exist today. But overall, that’s something where we see there’s a lot of promise, and opportunity to do things a lot better than we have.


Let’s talk about that point, how we need to do better than we have. Because traditionally, people think blockchain, and then they think cryptocurrency, and then they think money laundering, which is not a great association.


Well, I definitely feel cryptocurrency is something that money launderers have been going to, because of the inherent nature of what it is. But, yeah. I think the first tokens that were created, and the first digital currencies, or the first cryptocurrencies like a Bitcoin … A lot of those never really addressed the idea of fraud, or inherent in the way that they were created, they created an opportunity for individuals that wanted to proceed with fraudulent transactions to use it. It sort of creates an extra layer of protection for them.



And I think part of what we’re looking to do at Ivy is to break apart some of that, and to create additional layers of transparency and visibility. Ultimately, we feel we want to be supporting people who are doing legitimate business, people who are legitimate actors in the global economy. Those are the individuals we want to help, and we want to help bring just more data points to this process. Because ultimately that’s what’s gonna help prevent fraud, is to have more information associated with the particular transactions that are happening on a day to day basis. And then banks, financial institutions, and other entities can better make decisions on what to accept, what to process, what to hold up, and what to report to the authorities.
Eric: Can you speak a little bit about what it means to be using tokens, to increase KYC and KYT data that is included in a payment transaction?



Yeah. So, I think just at a high level, you can think of blockchain as really just data that’s connected to each other. What we’re trying to do is to embed additional data points, to bring additional transparency and visibility to those transactions, and the movement of money in general. You know, in today’s example, let’s say not in the blockchain or digital currency space, but let’s say just at a normal bank. There’s a know-your-customer type of information that a bank is required to take, and that includes things like a photo of the person, data points that create proof of identity and proof of address. These things could be a driver’s license, a passport, etc. These are sort of the basic items that someone needs to provide in order to create a bank account, and then be able to make transactions in a particular bank.


So we were thinking, “What if additional data could be attached to the account, or the specific transactions that are going in and out?” In a business to business transaction, you could think of this as, in addition to the information we spoke about, this could be a photo of the goods actually changing hands. So, if someone were to buy a car, you could include a photo of the car, and that data could be stored in a blockchain. Or an actual invoice, a PDF of the actual invoice could be stored, rather than just an invoice number or you know, today, where it doesn’t have any of that information.




If banks were to help legitimize the transactions that are going back and forth, we would need additional data to be able to make banks comfortable with that. You know, today, if a bank looks at, let’s say a Bitcoin transfer from one account to another, without any visibility over what the funds were used for, or whether those funds comply with the internal regulations and rules, they’d most likely not want to touch it at all. Which is what we’ve seen. There’s been a hesitation for traditional financial institutions to want to be involved in this space. But what if a company could provide all the data that’s necessary to do current KYC practices, and push that a bit further, and allow for additional things … You know, what we’re saying, like KYT, know your transaction type of information, that help to validate a legitimate transaction. If the actors that are making those transactions aren’t willing to show that type of information, then that’s fine. That just won’t be something a bank will accept. But if you are using digital currencies as a way to sort of help your business legitimately grow, or help to make real transactions that are perfectly legal, then we want to allow this new technology to help you take advantage of the things inherent in blockchain technology, which we think are things like improved security, improved fraud prevention, the speed of transactions, and ultimately compliance for the banks.


So, one of the things that that brings up, and is interesting to myself, is you know, we hear about banks creating their own blockchain. There’s now a group, I believe out of Europe, that is trying to create a standardized blockchain across the world. How do you go about making that a standard? How does that become a standard? Or is it something that you really are creating yourself, and people have to jump on to that platform? Do you mind addressing that?




Yeah, I’m happy to. One of the buzzwords that blockchain technology is currently exploring is the idea of interoperability. That is something where different blockchains can interact with each other. You know, ultimately, a way to be compatible, really. I think of the blockchains that exist today, there are some that have different features and different advantages, and differentiations between each. What we’re talking about is sort of storing the data, and being able to create better paths, better fraud prevention. We imagine it to be able to be compatible with the other technologies that are out there. So, when banks are establishing new blockchains, or other FinTech companies are establishing their own versions of a blockchain, we all see that as a positive thing. Because ultimately, we see tons of applications where blockchain technology can actually improve the incumbent systems that we’re all working with today. And there’s a way for those systems to talk to each other and work with each other, so we don’t see it necessarily as a conflict. We see this as sort of a progression of just better technology.
Eric: How are you addressing this from a regulatory aspect? Because the banks are so heavily regulated, that for them to deal in crypto, and have to deal with that know your customer information, and all of the fraudulent activity that goes on, and how they have to protect themselves and the consumers… How are you dealing with the regulatory aspect, as you’re building this and promoting this?



Yeah, I think the regulation is incredibly important. I think from my perspective, my personal perspective, anyway, I think regulation is key to the legitimacy of this particular industry. The way we’re dealing with it is twofold. One, obviously with the bank partners that we’re engaging with, we obviously have to comply with their compliance standards. We’re gonna need to comply with their regulations, and the way that their specific institution interprets the rules and compliance of banking law. So that’s, one hand we are working with the compliance departments, the BSA officers, the A&L analysts within those banks, to help design the solution that we’re proposing.



And then the other side for us is actually to interact directly with the government agencies. You know, I mentioned in my prior life, I worked as a commercial banker in the U.S., and I was lucky enough to establish some relationships with members of the FDIC and OCC. One of the great things about those institutions in our government is that they’re usually pretty open to having conversations about new technologies, because as a regulatory body, they want to know what’s coming, and they want to know how they can kind of better interact with that, if that becomes something that is adopted in the country. And so, that’s something where we’ve had some proactive discussions, where we’re at a high level. We discuss what the ideas are. You know, what we’re trying to build. How this can potentially be a help to the banks, which is who they regulate, and ultimately to the consumer and to the businesses that exist in the U.S.
Eric: Interesting. So, you’re seeing the regulators grasp ahold of this as well. It’s not like they’re fighting that. I mean, obviously the banks want to grab on to this kind of technology, but you are seeing those regulators want to work with the banks to implement this?


Yeah. From a regulatory standpoint, the regulatories that we’ve spoken to, mainly, the main thing is really compliance and adherence to the law. So, if you show them a tool that gives banks a better way to comply with the rules, or there’s better auditing trails, or there’s better information for banks to make more educated decisions, I think that’s something regulators, at least at the high level, have been supportive of.



Now, you know, implementation and execution of these things might be a different thing when that time comes. But I think at a high level, when you’re talking about improving something, making it so that banks can better comply and be fined less because they’re making better decisions, I think that’s a win for everyone. The banks themselves, for the regulators, and for the customers that are at the bank. Ultimately, the proof is in the pudding when we’re ready to show the product. But for now, I think some of the high level discussions we’ve had, they’ve been very open to having these discussions, and have been supportive of the ideas that we’re putting forth.



One of the things that we’ve talked about, on one of our past episodes, these massive data breaches that are occurring. We’ve spoken about digital ID. So, we’ve got thumbprints. There’s eye scanners that are out there. Now I believe that there’s even talk around digital identity, and people being able to actually manage via blockchain their own identity, and what kind of information is shown, not shown. Question that’s come up is, this is still all data. I mean, I know it’s distributed, but it’s still all data. How does this technology, and how does holding that data in a blockchain, protect a breach of actually getting ahold of that information, or that blockchain? We’ve heard in the press about cryptocurrency being stolen. How is this more secure than other forms of combating or addressing fraud with the institution?


There’s a lot of confusion associated with it, and when you read articles in the news about, you know, “$50 million has been stolen by this exchange”. I think a lot of that, if you dig a little bit deeper and understand why that happened, it wasn’t that the inherent technology was bad. It’s just there’s a new kind of security protocol that’s associated with this, and it’s not something people are comfortable with. And so, with that being said, there’s these instances where people can accidentally give up something, and there’s no layers of protection that prevent that person from potentially stealing the money, or the value that’s stored in those wallets.


From my perspective, that is part of the problem, is that there’s sort of a lack of education for how digital currencies work in relation to fiat, and people are thinking about how their bank accounts work, and trying to apply that to digital currencies. That’s actually probably not the safest way to think about it, and that’s what’s caused a lot of the fraudulent actions or thefts, and other kind of negative aspects of what we’ve been reading on the news.


One of the topics we’ve talked about as we’ve dove into fraud is the education piece, right? Because these banks are trying to figure out how to continue to transact with customers through digital means, without creating friction in that process, but some of that friction is required. And I think the more education people have, and understanding why some of that friction is there is to protect them, I think that education piece is gonna be huge. So, is there anything else that you guys are looking at, forward thinking, that maybe our listeners would be interested in hearing?



Yeah. You know, I think … Again, blockchain, I feel like it’s still in its infancy as a technology. I think again, this is similar to kind of when the Internet was started. There was a lot of noise. You know, there was a lot of opportunity. And with that, there’s a bunch of things that come with that. There’s a lot of people looking to take advantage of those particular conditions, and so as you’ve seen thousands of ICOs pop out, and some of them are legitimate. Some have real business models and real objectives that they want to accomplish, and others are just there to raise the funds and kind of run away.


Ultimately, there is a lot of potential for blockchain to do some really, really good things in the world, and we’re still in the infant phases of it. So, it’s gonna take some time. We’re gonna need to test out all the issues that work and don’t work. And I think from a consumer standpoint, I think when mass adoption comes, we’ll see a lot of tangible improvements on how things are done today.


Thanks again, Gary, for joining us today.
Gary: Thank you.
Eric: If you enjoyed this interview, don’t miss our other episodes. Subscribe to the Finance Frontier wherever you listen to podcasts, or listen online at thefinancefrontier.com.

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