POST Standard option

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Celebrated physicist Geoffrey West once observed that cities exhibit superlinear growth, meaning that as a city gets bigger, every person there becomes more productive. However, companies exhibit the opposite trend. Companies are nearly always killed by bureaucracy and administration crowding out creativity and innovation. Because, inside a company, “someone has got to take care of the taxes and the bills and the cleaning the floors and the maintenance of the building and all the rest of that stuff”.

Which is why, in the aftermath of the breakup of Standard Oil in 1911 into what became Exxon, Mobil, Chevron and other spinoffs, the value of what had been Standard Oil doubled within a year

From Imperica – New knowledge for creative polymaths – Google and Facebook: the real reason they should be broken up is China.

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There’s a very interesting NPR Planet Money podcast about this, explaining how far from impoverishing Rockefeller, the break up greatly enriched him since he owned shares in all of the other oil companies! The point is that the goal of competition policy is not to take money away from (for example) Mark Zuckerberg but to create more wealth in the economy. The goal is to increase the net welfare and we know that competition is the way to do it. Noted internet investor Peter Thiel fully understands the fascist nature of monopoly capitalism and went so far as to write a book encouraging new businesses to aim for monopoly positions in order to obtain the best returns. What’s best for America, as they used to say, may not be what’s best for General Motors.

Passport to success

The governor of the Bank of England, the Canadian ex-Goldman Sachs economist Mr. Mark Carney, recently suggested that digital ID cards “would make it safer for people to access money online”. He is sort-of-correct. We do indeed need to do something to stop the relentless increase in identity-related fraud and scams (such as, for example, “man receives surprise message purporting to be from Mark Carney offering multimillion-dollar sum”)

I don’t think that a digital ID card is quite the solution, because I prefer a more sophisticated solution that is based on digital identities for everything and multiple personae for transactional purposes, but that’s splitting hairs at high level. I am right behind Mr. Carney on this, although I think he was wrong when he went on to say that such a scheme could also prove controversial and could “only be introduced by the Government rather than the Bank of England”. In my opinion he is mixing up the controversial idea of a national digital identity card of some kind with the uncontroversial notion of a some form of secure and convenient identity management for the purposes of interacting with regulated financial institutions.

Only a day after Mr. Carney’s remarks, the Emerging Payments Association (EPA) released its report on money laundering and payments-related financial crime, calling for UK financial institutions and payment processors to create a “national digital identity scheme to tackle these threats”. So let’s take this national digital identity for financial services and digital ID card for online identity checking in Mr. Carney’s terms and call the concept, for sake of brevity, the Financial Services Passport, or FSP. 

I don’t know if Mr. Carney has read my 2014 book Identity is the New Money (still available from all good bookshops and Amazon), but in there I wrote that “One very specific use of the [digital identity] infrastructure should be to greatly reduce the cost and complexity of executing transactions in the UK by explicitly recognising that reputation will be the basis of trust and therefore transaction costs. The regulators should therefore set in motion plans for a Financial Services Passport”.

A few year ago, I spent some time as co-chair (with Ian Jenkins of Deloitte) of the techUK Financial Services Passport Working Group, I was working on this problem with a bunch of smart people and no-one took the slightest interest in this obviously sensible conduct and I do not remember noticing the slightest inclination by the UK’s banks to work together on it. That Working Group, incidentally, was created because of recommendations of an earlier techUK report “Towards a New Financial Services” developed through 2013. Section 3 of this report is actually called “Identity and Authentication: Time for a Digital Financial Services Passport”. The conclusion of that section is

There is clearly a need to look again at identity authentication in financial services. In addition to creating inconvenience for consumers, the current approach is expensive to maintain and inadequate in serving an increasingly digital financial services industry. As trusted authenticators of identity, a new standardised approach by financial services organisation could enable wider societal benefits, while also unlocking new opportunities for the industry. However, moving from the current fragmented identity infrastructure to a standardised financial services passport would require overcoming several challenges; from the competitive dynamics in financial services, to the extent and scope of liability, whilst simultaneously maintaining KYC and AML compliance. In the first instance, the scope of a financial services passport needs to be more clearly defined. This requires a technology roadmap that can match objectives and requirements in managing digital identities in financial services with technical solutions and provide a feel for how trends may already be shaping the market in this space.

It is a testament to the power of my writing and my great influence in the financial services community that it has taken a mere five years for this idea to reach the governor and for him to put it forward as a way to “harmonise the various different systems of online identity checking” and he is right to see it this way. Perhaps now is the right time to use this impetus to revise the concept for Jersey.

So what could a practical Jersey Financial Passport (JFP) actually look like? In the techUK discussions, we explored three broad architectures: 

  1. A centralised solution, some sort of KYC utility funded by the banks. This was seen as being the cheapest solution, but with some problems of governance and control. It could also be a single point of failure for the financial system and therefore unwise given that we are now in a cyberwar without end.

  2. A decentralised “blockchain” (it wouldn’t really be a blockchain, of course, it would be some form of shared ledger) where financial institutions (and regulators) would operate the nodes and all of the identity crud (“create, read, update and delete”) would be recorded permanently.

  3. A federated solution where each bank would be responsible for managing the identities of its own customers and providing relevant information to other banks as and when required. 

At the time, I thought that the third option was probably best but I’m open to rational debate around the topic. Let’s just say for sake of argument though that in response to Mr. Carney’s comments, the Jersey decided on a federated solution using the three-domain identity (3DID) model. It would look like this.

3DID Bank Framework//embedr.flickr.com/assets/client-code.js 

All of the standards and technologies needed to make this happen already exist except in one area. Let’s imagine that the digital identity is, basically, a key pair. The virtual identity is then a public key certificate. The credentials in that certificate are where we need some standardisation to define attributes (eg, IS_A_PERSON, IS_OVER_18, HAS_OVERDRAFT_AGREEMENT or whatever). It does not seem an insurmountable problem, however, for Jersey to draw up a specific shortlist of relevant attributes for the island’s financial services providers to use so that they could communicate effectively and save both time and money for all concerned.

It strikes me that we should go back to thinking about this very specific implementation of a more general digital identity scheme for Jersey. A Jersey Financial Passport could form a fundamental element of a jurisdictional competition strategy that is genuinely transformational.

Moneyness: The Haitian dollar

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For monetary enthusiasts like myself, it provides a great illustration of the many different functions packaged into the thing we call “money.” These functions needn’t be unified into one object or instrument. They can be split up, so that the instruments that we pass from hand to hand (or from phone to phone), the so-called medium-of-exchange, no longer correspond to the symbol used for pricing, the unit-of-account.

From Moneyness: The Haitian dollar.

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Digital ID cards could keep online finance safe, says Carney

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Digital ID cards would make it safer for people to access money online, Mark Carney has suggested, as the boom in internet banking and the death of bank branches leads to new types of identification and financial security.

The Bank of England Governor raised the idea as a way to harmonise the various different systems of online identity checking.

From Digital ID cards could keep online finance safe, says Carney.

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Back to the hard e-euro again

A few years ago I raised the issue of the impact of changing technology on the choices available to those wanting to redesign money in a European context. My main post was that the cost of creating new currencies has collapsed because of the internet, mobile phones and smart chips everywhere. In the context of the serious economic problems in Greece at the time, I said that Greece could pull out of the Euro and create a “hard e-drachma”. I went on to point out that there is no need for physical currency.any more.

So what?

Well, as I remember from the time, I was loafing in bed with a cup of tea listening to Radio 4 when “A Point of View” came on. I listened, spellbound, to the historian Sir David Cannadine talking about the history of currency unions in Europe. In ten minutes, David gave one of the most interesting talks I have ever heard on BBC Radio 4 (you can read it here).

David’s description of the Latin Monetary Union (LMU) was concise and brilliant. Follow the link and read it for yourself: I won’t traduce the narrative through paraphrase but the highlights are, essentially, that the Europeans formed a monetary union in 1866, Britain refused to join, Greece got chucked out and in the end the whole thing collapsed.

There really is nothing new under the sun.

So will history repeat itself? Forum friend Keith Hart, author of “The Memory Bank“, a book about money from an anthropological perspective, wrote about the state of the European monetary at the time that the big mistake was to replace national currencies with the euro and noted that an alternative proposal, the hard ecu, would have floated politically managed national currencies alongside a low-inflation European central bank currency.

I couldn’t agree with Keith more about this. The hard ecu, or as I used to like calling it, the e-ecu (since it would never exist in physical form) was always a better idea than the euro. When John Major proposed this extremely sensible alternative to the euro, saying that it would be used initially by businesses and tourists, and managed by a new European monetary fund, he was ignored.

The idea of the hard ECU was to have an electronic currency that would never exist in physical form but still be legal tender (put to one side what that actually means) in all EU member states. Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs, tourists could have hard ECU payment cards that they could use through the Union and so on. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cheques and cards — and the cost of replacing them would have been saved. After writing about this last year, I subsequently discovered that the proposal goes back well into the early days of Margaret Thatcher’s government.

In fact, the origin of [the hard ecu] was seven years earlier in the 1983 report of the European Parliament on the European Monetary System… The parallel-currency proposal was supported across the political and national groups in the parliament, including by the Germans so long as the central bank only concerned itself with stability of the currency (as subsequently transpired). It was taken up by Margaret Thatcher as the acceptably cautious route towards a single currency for Europe, part of her much cherished drive for a single European market for Britain’s successful financial-services industry.

[From Letters: On New York’s courts, Cyprus, Mexico, Dennis Ritchie, the euro, Manchu, obesity, doofuses, New Orleans | The Economist]

The idea of an electronic currency union to facilitate international trade has new resonance. While Bitcoin captures the media attention, there are a great many possibilities: new community currencies, brand-based plays, commodity baskets and goodness knows what else. All of these make it an exciting time to be in the electronic money business, but they also make it unpredictable, which is why it is fun. A couple of years ago, people began to look to social media as the natural place for new currencies to emerge:

If Facebook were a country, it would be the third largest in the world, so it figures that the social networking giant is trying to develop its own currency – Facebook Credits.

[From Facebook Credits starting to make some real money]

It isn’t a country, of course, and we shouldn’t get too carried away with that kind of thinking, but the point holds. If communities are the natural basis for currencies, then there are many communities (both “real” and virtual) that might incubate the successor to the euro (and, for that matter, the Dollar and the Yen). My review of Matthew Bishop and Michael Green’s “In Gold We Trust”, I said that

I support their observation that (as Hayek thought) we might reasonably expect many forms of private currency to develop in the post-fiat world and there is no reason to imagine that only a single alternative will emerge.

[From In Gold We Trust – don’t we? | The Enlightened Economist]

We’re not looking at a world in which some kind of new currency takes over, but a world in which a great many communities choose the currencies that are most efficient for themselves.

Fintech firms want to shake up banking, and that worries the Fed | Reuters

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“But some fintech firms say they would be reluctant to invest the time and resources in applying for and maintaining the new OCC fintech license unless the Fed gives them access to the payments system, so they will not have to depend on banks to route money for them. Direct access would eliminate bank routing fees, a top-five operating cost for many fintech firms, and would allow them to compete more effectively with traditional lenders.”

From “Fintech firms want to shake up banking, and that worries the Fed | Reuters”.

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Fed should open the payments system to fintechs | American Banker

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“Unfortunately, several high-ranking Fed members have recently expressed reticence about letting fintechs in. This concern is somewhat misplaced, and the Fed should seek to open up the payments system.”

From “Fed should open the payments system to fintechs | American Banker”.

I agree with Brian Knight about this. We need to further separate payments from banking and there is no reason not allow a new class of institutions access to the payments networks while preventing them from engaging in risky credit creation.

Hacked KYC data collected from top exchanges for sale on the dark web – Cryptoline News

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“According to reports coming from CCN, a hacker is selling hacked KYC data on the dark web, data which the hacker claims to have collected from some of the cryptocurrency exchanges such as Poloniex, Binance, Bittrex and Bitfinex.”

From “Hacked KYC data collected from top exchanges for sale on the dark web – Cryptoline News”.

Well, whether this is true or not, it does rather point to the fact that there are better places to store KYC data. Places that have extensive security in place already and spend gazillions on maintaining it, places that are regulated and held to account your identity is stolen and places where the costs of collecting KYC are high and rising. We call these places “banks” and it seems rather obvious to me that cryptocurrency exchanges, mobile phone shops and, for that matter, other banks should be using this bank KYC data instead of trying to do their own expensive and imperfect KYC in parallel.

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