Snippings

Here’s an example of the kind of proposition this drives: kevin. This is a Lithuanian payments startup that just secured $10 million in new capital in a seed funding round co-led by OTB Ventures and Speedinvest, two of Europe’s leading venture capital investors in early-stage European technology companies. The round also included OpenOcean and Javier Perez’s Global PayTech Ventures. Their POS product enable customers to pay from their bank accounts through existing card terminals using NFC technology. Tadas Tamosiunas, CEO and co-founder claims that up to 40% of their customers’ transactions are being made directly open banking via mobile apps and when it comes to online payments it’s more than 70%. They already have 2,700 merchants in 15 markets, including Sweden, Finland, Norway, Poland, Netherlands and Portugal so clearly merchants are open to alternatives to payments based on card rails.

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Once identity is solved, credit risk becomes easier. You can’t commit fraud or default on your debt just by wriggling free into the ether; your credit history is immutable and follows you everywhere.

From The Future Of Money: A Complete Revolution:

Or, to put it more simplistically, once you know who everyone is, payments are easy.

Identity is the New Money

 

Matt Harris, a partner at Bain Capital Ventures, wrote about this recently in Forbes highlighting that for the world of decentralised and embedded financial services (and, in fact, everything else) to reach its full potential, individuals and organisations must be able to establish the identity of counterparties on a per transaction basis “even if pseudonymous”. That caveat is crucial because, as I wrote in my 2014 book “Identity is the New Money”, pseudonymity is the sword the cuts the Gordian knot entangling security and privacy in a stultifying embrace.

In this new world, we don’t want society to have to trade-off security and privacy with each other, we want both security and privacy at all times and without consumers having to assume responsibility for their own protection. We want it to be part of the infrastructure, like the seat belts and crumple zones in cars.

What the ability to work with persistent pseudonyms, and thus build up a history of the credentials associated with pseudonyms over time (ie, reputations) means in practice is that when you come to engage in a transaction your counterparty can be certain that while they do not who you are (and may have no feasible way of determining who you are, thanks to the miracles of modern cryptography knows who you are. In other words, as the recently-issued G7 document on the  principles for a retail central bank digital currency puts it, it is not necessary for everyone to know who you so long as someone knows who you are.

A rather obvious “someone” in the case of financial services is your bank. Apart from anything else, they already know who you are. Or at least they should do if they are obeying the law about knowing their customers, monitoring them for anti-money laundering purposes, checking on their status as politically-expose persons, knowing what their business as and watching for terrorist behaviour and so forth. So identity is currently a cost centre, when there is an opportunity for it to be a platform for new products and services. I’m not the only person who thought that age verification legislation would be the trigger for a sophisticated federated privacy-enhancing bank-centric ID. Here, for example, is an eminently practical suggestion for moving forward:

Modifications to open banking could allow bank customers to share data on their identity and their date of birth with third parties in a double-blind way that stops their bank from knowing the site they want to visit, or the site they’re visiting from knowing their identity.

Well, whether it’s used for age verification for adult sevices or a pensions dashboard for financial health, I would have thought that what the European Commission Expert Group on Electronic Identification and Remote KYC Processes calls an “attribute-based LoA-rated KYC framework for the financial sector” (or what I would lazily label a “financial services passport”) would boost efficiency across many sectors as well as delivering solid foundations for the next-generation financial sector that Matt Harris is predicting.

Now, whether we call it a Financial Services Passport, a Moolah Monicker, a Payment Persona or a Finance Face doesn’t matter: the object is to create a persistent pseudonym that can be used for transactional purposes without disclosing any personally-identified information (PII).

Pseudo

The idea of pseudonyms is hardly

John Herrman, writing in the New York Times, frame the issue succinctly: there is scant evidence that “real name” policies mitigate abuse but there is plenty of evidence suggesting that forcing people to expose more private information can intensify it.

 

What followed early, credentialed online spaces was, in retrospect, an accidental golden era of online identity construction — a widely accessible web where people adopted handles and chose email addresses, logged into chat rooms and chose their own web domains.

 

Today, it’s hard to overstate just how thoroughly connected a typical internet user’s various identities — legal, chosen, assigned — have become. There are obvious examples in services like LinkedIn, where one’s public-facing, searchable professional identity is associated with their social identities elsewhere. Platforms that ask for legal names are woven through countless other social networks, shopping sites and commenting systems through unified login features. Facial-recognition technologythreatens to tie together all of our identities, everywhere and always.

 

Part of the reason for my delight and excitement at the CSFI’s invitation is that many years ago I picked up a report from the CSFI called “The IBM Dollar”, written Dr. de Bono.

His writing had an immediate impact on me, coming as I was from the technology side of electronic money. IBM, in de Bono’s early 1990s thought experiment, might issue “IBM Dollars” (what we would now called “tokens”) that would be redeemable for IBM products and services, but are also tradable for other companies’ monies or for other assets in a liquid market.

Matt Harris, a partner at Bain Capital Ventures, wrote about this recently in Forbes highlight that

Rather than our current conception of money – a token that is a representation of an entry in a central bank ledger – our assets will be 100% invested at all times, and we will shift those assets around between and among counterparties, who can instantly (and without cost) shift between various stablecoins.

From The Future Of Money: A Complete Revolution:

He is right. This view of the future of money, that money as an intermediary disappears because assets can be traded as money-like instruments, is what 

When I read de Bono’s ideas of tens of millions of tokens in circulation, constantly being traded on futures, options and foreign exchange markets, it might sound as if “money” would be unusable because transactions would be unbearably complex for people to deal with. But that’s not the world that we will be living in. This is not about transactions between people but, as I wrote in my book “Before Babylon, Beyond Bitcoin”, transactions between what Jaron Lanier called “economic avatars“. This is a world of transactions between my virtual me and your virtual me, the virtual Waitrose and the virtual HMRC. This is my machine-learning AI supercomputer robo-advisor, or more likely my mobile phone front end to such, communicating with your machine-learning AI supercomputer robo-advisor.

These robo-advisors will be entirely capable of negotiating between themselves to work out the deal. Dr. de Bono foresaw this in his pamphlet, writing that pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction… the same system could match demands and supplies of financial assets, determine prices and make settlements. He also wrote that the key to any such a system would be “the ability of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties”

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Once identity is solved, credit risk becomes easier. You can’t commit fraud or default on your debt just by wriggling free into the ether; your credit history is immutable and follows you everywhere.

From The Future Of Money: A Complete Revolution:

Or, to put it more simplistically, once you know who everyone is, payments are easy.

De Bono

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Credit Suisse forecasts virtual card payments to reach US$286 billion in volume in 2021, rising at a compound annual growth rate (CAGR) of 19% between 2017 and 2020 (more than double the underlying growth rate)

From Virtual Debit/Credit Cards Take Off Amid Rising Theft, Digital Shift | Fintech Schweiz Digital Finance News – FintechNewsCH:

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Real-time payments are playing an increasingly important role in the global payments ecosystem, with the number of such transactions soaring by 41 percent in 2020 alone, often in support of contactless/wallets and e-commerce.4 Over the last year growth in instant payments varied widely across countries—from Singapore at 58 percent to the United Kingdom at 17 percent.

From The future of payments: Transformation amid turbulent undercurrents | McKinsey:

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The overall 5 percent decline in payment revenues is composed of divergent regional trends: Asia–Pacific, which has consistently outpaced other regions in payments revenue growth over the past decade, registered a 6 percent pullback in 2020, while Latin America’s 8 percent decline was the steepest of all regions. Europe, Middle East, and Africa (EMEA) and North America experienced revenue declines of 3 percent and 5 percent, respectively, mostly driven by continued reduction of net interest margins (NIMs) in EMEA and contracting credit card balances in North America.

The global contribution of net interest income (NII) to payments revenue has declined steadily from 51 percent in 2010 to 46 percent in 2020. Over the past year, a 31-basis-point contraction in global interest margins (compared to a decline of 25 bps predicted last fall) reduced payments revenue by $66 billion—two-thirds the total global net decline.

Proportionally, the impact was felt even more sharply in EMEA, which traditionally relies more heavily on NII, and endured an absolute decline of $42 billion over the past decade (Exhibit 2). Some banks have begun offsetting the interest revenue loss through higher account maintenance fees, while negative interest rates on accounts have materialized in some European markets—mostly on corporate accounts but increasingly on large retail deposits as well.

From The future of payments: Transformation amid turbulent undercurrents | McKinsey:

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Twitch also built ban evasion protections into the verification tools. Users are able to tie up to five accounts to a single phone number. If one account associated with a phone number is suspended, all other accounts associated with that same number are also suspended both site and channel-wide.

From Twitch announces new safety tools in the fight against hate raids – The Verge:

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FATF Will Finally Publish Crypto Anti-Money Laundering Guidance Next Week
President Marcus Pleyer said the watchdog now expects countries to implement its “Travel Rule” guidance as soon as possible.

From FATF Will Finally Publish Crypto Anti-Money Laundering Guidance Next Week:

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But what is the “Travel Rule”?

A couple of years ago, as you may have read in the Financial Times at the time, the Financial Action Task Force (FATF) extended their recommendations to include cryptocurrency exchange and wallet providers and such like, referred to as Virtual Asset Service Providers (VASPs). This meant that all countries must supervise and monitor these, and that they should apply anti-money laundering and anti-terrorist financing controls: that is, customer due diligence (CDD), suspicious transaction reporting (STR) and the “travel rule”.

The decision to apply the same travel rule on VASPs as on traditional financial institutions was greeted with some dismay in the cryptocurrency world, because it means that the service providers must collect and exchange customer information during transactions. The technically non-binding guidance on how member jurisdictions should regulate their ‘virtual asset’ marketplace included the contentious detail that whenever a user of one exchange sends cryptocurrency worth more than 1,000 dollars or euros to a user of a different exchange, the originating exchange must send identifying information about both the sender and the intended recipient to the beneficiary exchange. The information must also be recorded and made available to “appropriate authorities on request”.

This identifying information, according to the FATF Interpretive Note to Recommendation 16, should include name and account number of the originator and benefactor, the originator’s (physical) address, national identity number (or something similar) or date and place of birth. In essence, this means that personal information will be smeared all over the interweb tubes. My good friend Simon Lelieveldt, who is very well-informed and level-headed about such things, said at the time that this is a “disproportional silly measure by regulators who don’t understand blockchain technology”, which may be a little harsh even if not too far from the truth.

Anyway, some folks from the land of crypto have put together a standard for implementing the travel rule in the hope of spurring interoperability and reducing the costs for all involved. The standard, known as IVMS101, defines a uniform model for data that must be exchanged by virtual asset service providers (VASPs) alongside cryptocurrency transactions. The standard (you can download it here) will identify the senders and receivers of crypto payments, with such information “traveling” alongside the cryptocurrency transactions but along a separate path (that is, the IVMS101 messages do not themselves need the blockchain or any other crypto infrastructure).

(If you are wondering why it’s called IVMS101, it’s because the SWIFT MT101 message is the global standard request for the electronic transfer of funds from one account to another. For those of us in the payments world, MT101 is mother’s milk: mandatory Tag 20 Sender Reference, optional Tag 21 Customer Specified Reference and so on and so on. The MT101 message is used throughout the business world to send bulk payment instructions (ie, a header and multiple payment instructions in a single message). There is also the MT103 message that instructs a single transfer but this is mainly used to move funds between banks and other financial institutions such as money transfer companies.)

IVMS101 is pretty thorough and it sets out in detail what messages should be passed from (eg) one Bitcoin exchange to another, along the lines of:

if the originator is a NaturalPerson then either (
     geographicAddress
          with an addressType value of GEOG or HOME or BIZZ 
     and/or customerNumber
     and/or nationalIdentification
     and/or dateAndPlaceOfBirth )
is required.

This sort of thing is needed because there’s no global standard digital identity that could be attached to messages so market participants have to make do with national solutions or proxies. Nevertheless, it’s a good standard (as you’d expect when you see who wrote it) but uncharitable persons might well be asking what the point of it is because law enforcement agencies can already get this information by presenting a warrant. What the travel rule does is to, essentially, automate mass surveillance without a warrant or any other oversight and force personal information on to marketplace intermediaries (where, in my opinion, it doesn’t belong – my date and place of birth is no business of either intermediary exchanges or, indeed, the destination exchange). What’s more, since the travel rule is for value transfers between exchanges, it seems rather unlikely that it will catch any criminal flows at all.

I, for example, have a Coinbase hosted Bitcoin wallet and a Bitcoin wallet on a USB stick. If I want to send money to criminals, I will transfer it from my Coinbase wallet to my USB wallet and then from my USB wallet off via mixers to the criminal’s USB wallet and the travel rule is irrelevant. The uncharitable people mentioned earlier will undoubtedly observe that since the actual travel rule doesn’t seem to have stopped money laundering which is a massive global industry, there’s no obvious reason why the virtual travel rule will stop electronic money laundering on a similar grand scale.

[bctt tweet=”The enforcement of a regulation (the travel rule) that was created over 20 years ago for a fast-evolving industry, may not be the best approach for cryptocurrency.” username=””]

Writing in this month’s Chartwell “Compass” magazine, Omar Magana hits the nail on the head with respect to the travel rule, asking if “the enforcement of a regulation that was created over 20 years ago for a fast-evolving industry, may not be the best approach”. Note that he is not arguing against regulation, he is arguing (as I do) for a form of regulation more appropriate for our age (for which I use the umbrella term “Digital Due Diligence”, or DDD) using artificial intelligence and machine learning to track, trace and connect the dots to find the bad actors.

I am genuinely curious to learn more about whether the travel rule will make the slightest difference to the money launderers, so please do let me know in the comments whether such scepticism is misguided or whether the travel rule will make the world a safer place.

 

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To gain ground on the dollar, the digital yuan would require extensive international adoption. But there are a lot of obstacles before that happens: restrictive capital controls, lukewarm foreign audiences and lack of applicability, and a crowded international playing field. In particular, Beijing’s efforts to prioritize domestic financial stability through capital controls and tight management of the yuan exchange rate coupled with growing geopolitical assertiveness have tied its hands abroad. Without loosening capital controls, it is difficult to improve the attractiveness of the yuan as a readily accessible currency.

From China’s Digital Yuan Is a Trial Project Aimed at Domestic Needs:

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