How Blockchain Would Have Prevented the WireCard Fraud

by | Sep 28, 2020 | Industry | 0 comments

Since early 2019, Dan McCrum, from the Financial Times, has been reporting that Germany fintech company Wirecard AG was faking its revenue, and Wirecard has been furiously hitting back by condemning McCrum of colluding with short sellers to bring down its stock.

In mid-June 2020, Wirecard reported that some of its funds were missing, and just a week later, the company admitted: “that there is a prevailing likelihood that the bank trust account balances of 1.9 EUR do not exist.” It went on:

The Management Board further assesses that previous descriptions of the so-called Third Party Acquiring business by the company are not correct. The company continues to examine, whether, in which manner and to what extent such transaction has been conducted for the benefit of the company.

When you continue to inspect what your business has been practicing, that is poor. At least, for a public company, you should be aware of what is happening in your company all the time. Or, if you have to examine, you ought to get a quick answer. Wirecard’s stock has declined by 85% for the last two weeks, its chairman has resigned, and his margin loan has been called, and is renegotiating its debt.

From the recent happenings, McCrum is a great reporter. Still, even if you did not know that when a firm is busy accusing reporters of collaborating with short sellers to see its downfall this is a clear indication that it is going down. Businesses that are not involved in fraud, when reporters inquire whether they have forged their revenue, respond by explaining the source of their income. Those that are doing fraud respond by calling law enforcers to try and arrest the reporters.

Weirdly, Wirecard went unnoticed for quite a long time. The German financial watchdog, BaFin filed a criminal complaint against FT reporters and short sellers. Besides, it prohibited short selling of Wirecard stocks for two months, to “protect the company from speculators.” The Wirecard situation, now, is sort of insignificant; any individual who read McCrum’s articles and knew the almost-unfailing rules of short-selling conspiracy theories suspected that Wirecard was faking its revenue. The greater implications of the situation are for BaFin, which concentrated on protecting Wirecard from speculators when, in fact, the speculators needed protection from Wirecard. It is not a good look:

“The Germans institutionally were just determined to rally round and just not look at the facts,” said Crispin Odey, a London-based hedge fund manager who last year threatened to sue BaFin after it imposed the ban against short selling.

How blockchain-based payment processing services could have made the Wirecard situation easier to spot

A blockchain is a secure and immutable record of asset transfers. When this technology is used in payment processing services, it becomes easier to track the complete cycle of wire transfers. The potential of trusted dealings is one of the primary reasons financial institutions are turning to decentralized finance (Defi). If the Philippine banks mentioned in the Wirecard Fraud had been using blockchain technology, the money might have been misappropriated. Still, it would be easier to track and, therefore, recover them.

Distributed ledger system using blockchain would have created a complete revenue record for Wirecard, with copies of the transactions held on several computers (nodes), effectively preventing records from being altered. Besides, in a blockchain-based SWIFT all stakeholders, including the Ernest & Young auditors, would have been able to access transactions and validate them in time before the situation worsens.

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