A library of snippets
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“But Zuckerberg truly believes that stuff—that by connecting human beings we will all start behaving better. Thousands of years of human history to the contrary, he thinks that the mere act of connection contains some positive force, without anything else being present.”
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“Nick Abouzeid, a 21-year-old in San Francisco who works at a tech startup, received an unexpected $149 from a stranger along with the message ‘for a wonderful evening.’ Two minutes later, he got another message: ‘I again made a mistake (((.’
He decided to investigate. (The app allows users to view the transaction history of others, depending on their privacy settings.) The account, he found, was brand new. He ran the user’s profile picture through Google’s reverse image search engine and saw it used in other places. He also saw the user sent money to another person ‘for lesbian game,’ and a minute later wrote to that person: ‘wrong person, please refund.’”
From “You Accidentally Sent $149 to a Stranger on Venmo? Good Luck Getting It Back – WSJ”.
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“All Bitcoin transactions and wallets are recorded on a database known as the blockchain, by a network of computers that anyone can join.”
From “How Russian Spies Hid Behind Bitcoin in Hacking Campaign – The New York Times”.
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“The eyes of the world are on one of history’s largest cash withdrawals ever. Earlier this week, the Central Bank of Iran ordered its European banker, Hamburg-based Europaeisch-Iranische Handelsbank AG, to process a €300 million cash withdrawal. Germany’s central bank, the Bundesbank, is being asked to provide the notes. If the transaction is approved, these euros will be counted up, stacked, and sent via plane back to Iran. German authorities are still reviewing the details of the request.”
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Listening to Manuela Saragosa’s interesting BBC Business Daily episode about “fraud in the food chain” (I wouldn’t listen to it while you are eating, incidentally) I was reminded how long and complex the supply chains are in the food industry. That’s great for producers and consumers, but it has risks. How do you trust the food that ends up on your plate? How can you tell, to give one of the examples used in the episode (which included an interview with Jesse Baker of Provenance) that your tuna is sustainable?
Fortunately, the blockchain is going to fix this problem. As Michael Casey and his co-author Pindar Wong explained in their Harvard Business Review piece on this topic last year, blockchain technology allows computers from different organisations to collaborate and validate entries in a blockchain. This removes the need for error prone reconciliation between the different organisation’s internal records and therefore allows stakeholders better and timelier visibility of overall activity. The idea discussed in this HBR piece (and elsewhere) is that some combination of “smart contracts” and tagging and tracing will mean that supply chains become somehow more efficient and more cost-effective.
(I put “smart contracts” in quotes because, of course, they are not actually contracts. Or smart. Bill Maurer and DuPont nailed this long ago in their superb 2015 King’s Review article on Ledgers and Law in the Blockchain, where they note that smart contracts are actually computer programs and so strictly speaking just an “automaticity” on the ledger. Indeed, they go on to quote Ethereum architect Vitalik Buterin saying that “I now regret calling the objects in Ethereum ‘contracts’ as you’re meant to think of them as arbitrary programs and not smart contracts specifically”.)
This need for trust, however, takes us back to square one. As Manuela asks in the BBC programme, how can you trust the people entering the data? Consider another of my favourite scandals, the horsemeat scandal that swept Europe on the 50th anniversary of the salad oil scandal. Basically horsemeat was being mixed with beef in the supply chain and then sold on to the suppliers of major supermarkets in, for example, the UK. One of the traders involved was sentenced to jail for forging labels on 330 tonnes of meat as being 100% beef when they were not. Once again, I am curious to know how a blockchain would have helped the situation since the enterprising Eastern European equine entrepreneur would simply have digitally-signed that the consignment of donkey dongs were Polish dogs and no-one would have been any the wiser. It is not clear how a fintech solution based on blockchains and smart contracts would have helped, other than to make the frauds propagate more quickly.
I understand that Walmart have carried out some sort of pilot with IBM to try to track pork from China to the US. But if someone has signed a certificate to say that the ethically-reared pork is actually tuna, or whatever, how is the shared ledger going to know any different? A smart contract that pays the Chinese supplier when the refrigerated pork arrives in a US warehouse, as detected by RFID tags and such like, has no idea whether the slabs in the freezer are pork or platypus.
If you do discover platypus in your chow mein, then I suppose you could argue that the blockchain provides an immutable record that will enable you to track back along the supply chain to find out where it came from. But how will you know when or where the switcheroo took place? Some of the representations of the blockchain’s powers are frankly incredible but, as Jesse notes in the show, the blockchain is stupid. It doesn’t know who switched it and it can’t tell you.
So if the blockchain is so dumb, why bother with it?
So is there any point in considering a form of shared ledger technology for this kind of supply chain application? Let’s go back to the first example, the great vegetable oil swindle. Had American Express and other stakeholders had access to a shared ledger that recorded the volumes of vegetable oil being used as collateral then, as it happens, fraud would have been easily discovered.
“If American Express had done their homework, they would have realized that De Angelis’s reported vegetable oil ‘holdings’ were greater than the inventories of the entire United States as reported by the Department of Agriculture. “
via How The Salad Oil Swindle Of 1963 Nearly Crippled The NYSE
How might such a ledger might operate? Would American Express want a rival to know how much vegetable oil it had on its books? Would it want anyone to know? The Bank of Canada, in their discussion of lessons learned from their first blockchain project, said that “in an actual production system, trade-offs will need to be resolved between how widely data and transactions are verified by members of the system, and how widely information is shared”. In other words, we have to think very carefully about what information we put in a shared ledger and who is allowed to say whether that information is valid or not.
It is clear from this description that a workable solution rests on what Casey and Wong call “partial transparency”. I agree, and I borrowed the term translucency from Peter Wagner for the concept, as set in the paper that I co-authored with my then-colleague Salome Parulava and the R3 CTO Richard Brown — Towards ambient accountability in financial services: shared ledgers, translucent transactions and the legacy of the great financial crisis. Journal of Payment Strategy and Systems 10(2): 118-131 (2016).
As you might deduce from the title of that paper, we co-opted the architectural term “ambient accountability” to describe the combination of practical Byazantine fault tolerance consensus protocols and replicated incorruptible data structures (together forming “shared ledger” technology) to deliver a transactional environment with translucency. As Anthony Lewis, also from R3, described in an insightful piece on this new environment, it is much simpler to operate and regulate markets that are built from such structures because the cross-sector reconciliation comes as part of the fact recording; not after. Organisations can “confirm as they go“, rather than recording something, then checking it afterwards or having auditors check it downstream.
Luckily, there are cryptographic techniques such homomorphic encryption and “Zero Knowledge Proofs” (ZKPs) that can deliver the apparently paradoxical functionality of allowing observers to check that ledger entries are correct without revealing their contents and these, together with other well-known cryptographic techniques, are what allow us to create a whole new and surprising solution to the problem of the integrity of private information in a public space.
In this way the traditional disciplines of accounting and auditing are dissolved, re-combined and embedded in the environment. Smart contracts wouldn’t have disrupted Tino’s business, but ambient accountability would have uncovered his plot at a much earlier stage, when the near real-time computation of encrypted vegetable oil inventories would have delivered the data to end his dastardly plot.
It is far from clear to me whether “blockchain” solutions to the supply chain problem, or any other problem for that matter, will be cheaper or quicker than than the database alternatives. On the other hand, the introduction of new (and in some cases counterintuitive) forms of transparency may well improve the operation of complex supply chains to the great benefit of society as whole.
In his new book “Digital Human“, Chris Skinner sets out a straightforward vision of the bank of the future. He says (I paraphrase slightly) that the back office is about analytics, the middle office is about APIs and the front office is moving to smart apps on smart devices. Here’s the three part model that Chris describe.
I’ve invented the word “packaging” to describe the additional essential process that is needed to complete what we call the “Amazonisation” of banking, whereby products are manufactured as API services and distributed throughout the consumption of API services. What we don’t know, of course, is how this model will redistribute ROE. How will banks non-banks and neo-banks respond to the split of manufacturing and distribution that the new “packaging” layer (again, not sure if that’s the right term, I just couldn’t think of a better one) brings? That’s obviously a key question and one that is pretty important for organisations who are planning any kind of strategy around financial services in general or payments in particular. Since this includes many of our clients, we spend a lot of time thinking about this and the connection between technological choices that are being made now and the long-term strategic options for organisations.
The Deutsche Bank report is not all doom and gloom though. It goes on to make the point that banks can themselves
Of course, the beneficiaries will be the new financial service providers such as FinTechs or other software suppliers, who can now seamlessly attach their innovative services to the existing (banking) infrastructure. For BigTechs and retailers with a large customer base, the free-of-charge technical interfaces also open up new opportunities with respect to payment services, retail financing or other tailored products. But – somewhat surprisingly, perhaps – individual banks can also benefit. They, too, can act as third-party providers vis-à-vis other account servicing banks and offer an array of new or extended services to their customers, which will intensify competition among all providers.
We think it’s useful to share them here: the “traditional” bank, the banks as a platform (think Starling) and the bank as an aggregator (think HSBC and Citi).
If, as many people think, it turns out that ROE will remain higher in distribution then the commoditisation of the manufacturing function (as it turns into a “utility”) may well threaten some of the incumbents, because they will not be able to adjust the economics of their manufacturing operation quickly enough to stay in business! This may sound like a radical prediction, but it really is not.
The reality for many banks will, of course, be more of a mixture of these approaches, but you can see the point. The decoupling of the manufacturing and distribution means that banks will have to make some important decisions about where to play, and soon. We’ve already seen how some banks (eg, HSBC) have moved to exploit the aggregator strategy and how some banks (eg, Starling) have moved to become platforms with rich app stores. But what we think may be under-appreciated is the extent to which the traditional bank can develop the packaging process not to shift to one of these strategies but to make itself more efficient and to improve the time-to-market for new products and services while keeping the costs of IT infrastructure under control.
In other words, it makes sense for banks to amazonise themselves.
The Deutsche Bank report is not all doom and gloom though. It goes on to make the point that banks can themselves
Of course, the beneficiaries will be the new financial service providers such as FinTechs or other software suppliers, who can now seamlessly attach their innovative services to the existing (banking) infrastructure. For BigTechs and retailers with a large customer base, the free-of-charge technical interfaces also open up new opportunities with respect to payment services, retail financing or other tailored products. But – somewhat surprisingly, perhaps – individual banks can also benefit. They, too, can act as third-party providers vis-à-vis other account servicing banks and offer an array of new or extended services to their customers, which will intensify competition among all providers.
In
Ajay Bhalla is chief enterprise security solutions officer for Mastercard. He leads the team that develops product solutions to ensure safety and security for consumers, merchants, partners and governments in their global network. (He serves on the company’s management committee.) So when he talks about digital identity, he is worth listening to.
“What we need instead is a verified identity that is accepted globally and across multiple digital touchpoints.”
From “The future of digital identity verification will be as simple as saying ‘Hi, it’s me’ | City A.M.”.
Ajay is right about this, as you might expect. But I disagree that we need “a verified identity”. What we need, of course, are “verified identities” that we can choose from on a per transaction basis.
To illustrate the point, an anecdote. I was reading Ajay’s article.
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“The Cities for Financial Empowerment Fund works with Bank on DC and other groups to provide low-cost checkings accounts. ‘If someone is buying a salad or something, and it’s $6, and they need to swipe instead of using cash, the real underlying issue is they don’t have a bank account with debit-card functionality,’ said David Rothstein a principal with the fund. ‘That’s where the real problem is. It’s less about the use of cash, and it’s more about financial inclusion.’”
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If the past is any predictor for the future, the future of cards is very clear: there won’t be any of them, and we’ll be using our mobile phones as a mass market payment mechanism before 2012.
Interestingly, I go this wrong. Because what actually happened was that the contactless card technology which was taken up by the banks proved so successful, not only for transit in London (where
Snippings