Last year’s incidents and scandals will spark a technology re-evaluation and potential change of direction, the likes of which we haven’t witnessed for some time. Bill Mew looks back at some of the big tech dramas of 2022, examines how accurate last year’s predictions were and offers a few more for the year ahead.
Alan Cox once said: “I figure lots of predictions is best. People will forget the ones I get wrong and marvel over the rest.”
Thankfully my track record of looking back at the past year and offering predictions for the year ahead has so far been fairly solid. In my tech review of 2020, I suggested that events during the pandemic “may have caused the odd detour and either sped up or slowed down things in places, but the overall direction of travel remain[ed] the same”. A year later at the end of 2021, I looked at the future of fintech and predicted greater integration, whether via the cautious adoption of APIs (evolution) or more urgent and radical transformation (revolution), but again the direction of travel remained much the same.
2022 was very different. We have had massive incidents and scandals that have sparked more of a technology re-evaluation and a potential change of direction than anyone has witnessed for some time.
Living in denial
In a late Budget this year, the UK Treasury stared down the challenge of tackling a £60bn fiscal hole, partially down to unexpectedly bad economic conditions following Covid and Brexit, which led to lower growth and lower tax receipts, and partially down to the brief Truss government.
Not only is the government ignoring its responsibility for much of the damage, but it also remains in denial about the additional difficulties being caused by other longer-term projects like Brexit and Making Tax Digital (MTD). Although acknowledging this has been politically unpalatable, in 2023 I expect reality to dawn.
The ongoing MTD debacle, well-chronicled at every stage by AccountingWEB, is all too typical of major government projects that have hit difficulties, such as the digital ID saga. Unfortunately, MTD also represents a major transfer of risk and cost from HMRC to its ‘customers’ as companies, accounting firms and individuals have been expected to bear an ever-increasing share of the technical burden.
Companies are already facing local issues as well as global headwinds from the impact of the war in Ukraine and the spikes in oil prices, food prices and inflation that followed. The last thing that they need is the extra complexity, risk and cost being thrust on them by HMRC.
Inflation, redundancies and twits
The aforementioned global headwinds have hit the tech arena, where we witnessed a massive sell-off in tech stocks accompanying a significant re-evaluation of the long-term value of even the largest tech giants. For smaller tech firms and startups, the impact has been even harsher. Across the tech sector, we have seen widespread headcount reductions as firms have sought to adjust to the new reality.
Nowhere has this been more visible than at Twitter. Many may have thought (as I did) that Elon Musk’s Twitter takeover was at a rather full price but he could afford it – he was, after all, the richest man in the world. However, when the war in Ukraine started, inflation mounted and tech stocks plummeted, Musk’s bid for Twitter looked massively overpriced and his attempts to wriggle out of the deal ended up scaring advertisers away and undermining the platform’s credibility.
As a large part of the $45bn funding for the deal had been $13bn of corporate debt for a company that was probably then only worth about $13bn, immediately after the deal the company was effectively worthless, resulting in a loss on day one of about £30bn and making it one of the worst deals in history. On top of this, the cost of servicing the debt far outweighed Twitter’s cashflow, meaning that it required additional support just to keep afloat.
The irony is that online advertising revenue is directly related to trust in any platform, which is directly correlated with how effective content moderation is. Forum sites 4Chan and 8Chan have no content moderation, almost no advertising and thus no value.
Musk had not only bad-mouthed Twitter and scared away most of its advertisers, but content moderation also required budget and staff, neither of which the newly debt-burdened Twitter could now afford.
As both were cut dramatically, rather than leading to cost savings and a return to profit, it undermined any means of effective moderation which was the only chance that Twitter had of attracting back its advertisers. Thus Twitter has now entered a death spiral in which Musk claims it is facing potential bankruptcy.
Almost in parallel, the crypto bubble burst. In theory, cryptocurrencies offered a regulation-free hedge against traditional asset classes that were costly and over-regulated. In reality, however, investors exposed to falling share prices responded by liquidating their crypto assets. This meant that cryptocurrencies, far from being a hedge, fell in response to the market tightening and did so even more quickly than other asset classes. The fall was sufficient to then expose the highly leveraged positions that many crypto investors were in.
Why this was a surprise to anyone is possibly the biggest surprise at all. Back in May 2021, Musk himself, a long-term promoter of cryptocurrencies, announced that Tesla would no longer be accepting digital payments, and then in June, the Chinese authorities started a crackdown on crypto transactions and crypto mining, before finally declaring all crypto transactions illegal in September.
The wheels really started falling off though in June 2022 when Celsius Network, a major US cryptocurrency lending company, froze withdrawals and transfers, citing “extreme” conditions and Binance, one of the world’s largest cryptocurrency exchanges, paused bitcoin withdrawals.
Crime was also rife. Some of it was subtle – market manipulations common to such unregulated assets – but there was also more blatant criminality as well, with hackers stealing $625m from the Ronin Network in March 2022, Wormhole Bridge losing $325m in February, Nomad Bridge losing $190m among the many examples.
And it was not just the cybersecurity controls that were exposed. In November 2022, cryptocurrency exchange FTX went bust after its rival Binance pulled out of a deal to buy it. The fall of FTX exposed massive failures in fiduciary controls, with the exchange having an $8bn hole in its books as former billionaire Sam Bankman-Fried (known as SBF) had lent client funds from FTX (his exchange) to Alameda Research (his trading firm).
The consequences of all of this will be played out in courthouses for some time to come, but they are already apparent in changing market attitudes. In 2023 we will see:
A gradual acceptance of reality by the UK government:
- We will start to see senior politicians accept that Brexit has not gone well – few are likely to go as far as admitting that it has been a total disaster.
- We hope that government departments will learn from a few of their failed IT projects (possibly a forlorn hope) and be somewhat more accommodating with those impacted – such as those struggling with MTD. We have already seen HMRC postpone MTD for income tax self assessment (ITSA) by two years to 2026 – a welcome acceptance of reality.
An end to frothy valuations and a return to viable business models:
- Ventures in areas like fintech or cloud computing which were once seen as guaranteed growth markets will be reviewed with greater scepticism.
- Budgets and headcounts that have been tight in many other sectors for some time have now become restrained across the tech sector and will remain so for some time.
- The large numbers of people being laid off by tech firms of all sizes will not as much mark the end of careers, as it will the availability of people with valuable skills that have been in short supply.
A return to responsibility
- Once blockchain and the secure distributed ledger technology that underpinned everything from decentralized finance (DeFi) and Web3 to cryptocurrencies was seen as a form of magic that defied traditional accounting measures. No longer.
- Once also the freedom from the regulatory burdens that DeFi enjoyed was seen as an advantage. Again, no longer.
- While cost-cutting will be common in many areas, those that underpin trust and responsibility will buck the trend (see the examples that follow).
What will this focus on trust and a return to responsibility look like in 2023, specifically in relation to tech.
Example 1: Cybersecurity
In light of the increase in cyber threats, firms will need to re-assess their risk appetite and in all likelihood increase their spending on cybersecurity while also ensuring that they are crisis-prepared and ready to respond in the increasingly likely event of a cyber incident.
The World Economic Forum has recently stated that ‘fire drills’ are key for cybersecurity. Such drills not only help organisations be crisis-ready but can earn them a reduction in their cyber insurance premium as well as reduce any regulatory fines where they can show that they took such responsible measures.
Prevention and detection to thwart attackers will need to go hand in hand with preparation to deal with them in the event that they do get through.
Example 2: Effective content moderation
The digital advertising market may now have vast scale, but it also needs to be more trustworthy and responsible. As the Twitter debacle has shown, advertisers will rapidly abandon any platform that cannot moderate its content effectively – no responsible brand wants its ads to be shown alongside extremist content. Whether or not Twitter survives (at least in its current form), there is no going back.
Example 3: Compliance systems in DeFi
In the current environment of rampant fraud, increasing cyber threats, and governments putting a big focus on drying up terrorist financing, anti-money laundering (AML) and know your customer (KYC) compliance is becoming an even bigger focus for the financial services industry.
In a market that once prided itself on its lack of regulatory controls, the only viable way for decentralised finance (DeFi) to recover and regain any credibility will be to demonstrate not only that it has such controls in place, but that they are also robust, effective and efficient.
Not only is DeFi regulation certainly not an oxymoron – the two things are far from incompatible, but regulation is coming – whether players like it or not.
This can either be done at an individual company level, with fintechs like Social Finance (SoFi) seeking to operate as an online-only bank that offers FDIC-insured checking accounts and credit card products.
Or innovators can grasp the opportunity to reinvent compliance, harnessing the latest technologies to make it more efficient than ever before. For example, idclear is seeking to act as a specialist, trusted utility which conducts AML checks across the entire sector – rather than expecting firms to each bear the duplicative cost of such operations separately.
The future, therefore, looks a lot less like the wild ride we’ve seen in recent years.
And as for the Metaverse …. In my 2022 prediction article, I posited that despite all the investment, we will have to wait a while before it became a reality. We will have to wait longer yet.