Jeff Morris first exposed CBA’s Financial Planning scandal in 2008, where several CBA financial planners were providing bad financial advice contrary to their client’s interest, which was the result of conflicting employee remuneration practices within the bank. You can watch unfolding of events on ABC’s 4Corners Banking Bad by Adele Ferguson and Deb Masters.
“It’s going to be very hard for me to trust anyone at any bank at any given time because they were just ruthless… They knew he was an easy target and they just went for it,” A victim’s daughter told Four Corners [Banking Bad].
Then in 2016, Dr Koh further exposes the CommInsure’s unscrupulous practices buried in the conditions of the fine print of its contracts to deny, delay or avoid paying claims of CommInsure insurance contracts to heart attack victims.
And now in 2017, the latest scandal involving organised crime syndicates money-laundering over $77 million through Commonwealth bank. According to the Financial Review, CBA failed to report suspicious transactions between 2012 and 2015 totaling $625 million dollars!
What are the implications for wider society from these scandals? And, how can cryptography, blockchains and other innovations help prevent future scandals.
The recent and continuing scandals at the CBA are having far wider implications then we realise.
It is well known that trust is the glue that holds the financial industry and the wider community together, otherwise we wouldn’t trust complete strangers with our money in a bank account.
But, it is trust minimisation that encourages Australia’s economic progress.
“Trust minimization is reducing the vulnerability of participants to each other’s and to outsiders’ and intermediaries’ potential for harmful behavior.” Nick Szabo
Pre internet banking, you were required to visit a bank branch to withdraw, deposit or move money around from bank account to bank account. This required a certain level of trust, you needed to first trust the bank teller (a complete stranger) to follow the banks policies and procedures and deposit the money manually into your account. The stamp in your passbook also gave you a record and confirmation that transaction occurred.
Then trust is placed in the next employee, possibly up the line, to enter that transaction manually into banks ledger as a record of the transaction, again following the banks policies and procedures.
Post internet banking, we now complete these transactions on our smartphone and transactions are recorded by the bank via an algorithm. What has changed is the level of trust required to perform each transaction. It has been minimized.
We don’t need trust a computer algorithm, it does exactly as it is programmed. Whereas, the bank teller can commit fraud and steal the money you intended to deposit. While innovation is also convenient for consumers and the bank, it importantly allows participants to overcome human cognitive limitations.
Repetition of function in both scenarios over time will also result in a lowering the level of trust. The first scenario is more fragile to shocks.
The continuous banking innovations, throughout history, have reduced our vulnerability to fellow banking participants, outsiders, and this means we can direct our scarce cognitive capability towards our own progress, and avoid worrying about how banking participants and others might behave.
The now constant stream of CBA scandals has the ability to turn the stream in the other direction.
The major departments within the Commonwealth Bank hit by the scandals – Financial planning, insurance, and basic deposit systems – are departments relied upon by their customers and used on a daily basis.
People are now thinking, using that scare cognitive capacity, about their own banking needs, and non CBA customers will also be thinking about the issues too. If it can happen in Australia’s largest bank, it is quite possible it’s happening in the other big four.
Australian’s have enough to worry about – increasing costs of living pressures, stagnant wage growth, and reduction in full time work available – then thinking about if bank participants are behaving in a lawful and ethical manner.
What innovations help minimise trust.
“Blockchain distributed-ledger architecture has the potential to enhance security, speed, and operational efficiency for banks in several business areas such as payments, asset management, loyalty, and loans.” Capgemini
To avoid losing the forest for the trees, we will avoid discussing the intricate details of blockchain and cryptography, but I will provide links at the bottom of this article.
Cryptography is integrated into blockchain, and this allows the creation of new fiduciary applications be developed, that are normally governed by traditional fiduciary institutions.
One application is Smart Contracts. Smart contracts facilitate, verify, or enforce the negotiation or execution of an agreement.
ASIC were investigating CBA, in 2011, over the accusation that the CBA’s life insurance arm is denying heart attack claims by deliberately using an outdated definition buried in the policy.
A Smart contract can emulate the logic of regular contractual clauses. Deloitte recently developed a proof of concept for a life term insurance product recorded in a smart contract.
Insurance is a logical fit for self-executing smart contracts, since the conditions that lead to a payout can often be clearly defined beforehand in the insurance policy, and prevents bank employees, like in the CBA case, from diverting the outcome.
Bypassing the banks altogether.
Several central banks have conducted trials, with blockchain, issuing their own digital currencies, which allows citizens to hold their money (digital) with them directly.
Within a decade we could be dealing directly with our national central bank, instead of requiring a bank account.
“The issuance by central banks of digital versions of their fiat currencies onto distributed ledgers would lead to widespread disaggregation for commercial banks, which would be forced to fight much harder to attract funding alongside market-based funds in a radical upheaval of financial markets.” James Eyers
Eyers also reports that the Bank of Canada in 2016 announced Project Jasper, an experiment between Payments Canada, the Bank of Canada, major Canadian banks and R3, a global consortium of banks experimenting with distributed ledgers. The trial involved a digital token, known as a CAD-Coin, being issued to participants in the interbank payment market. It was used a medium of exchange after cash collateral was pledged into a special pool. The test suggested there is some way to go before this becomes a reality.
While trust may be the glue that holds the financial industry and the wider community together, it is innovations that minimise the role of trust that helps drive economic progress.
Alfred North Whitehead said, “It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them.” Friedrich Hayek added: “We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.”
Here are the links and sources about blockchain & cryptography (don’t get lost down the rabbit hole).