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Bitcoin, Blockchain, Cryptocurrencies, CBDC, CentralBanking, Consumer Banking, cross-border, CryptoValley, DID, digital identity, Fintech General, libra, money, regulation, stablecoins

Convergence or clash of non-natives & natives going Stable – #CVC19

2019_crypto_valley

The 2019 Cryptovalley Conference remains true to its nature. Three days, three stages, and overweight technical and economics content. I attended for two days and became A cool kid on the Blockchain. 

The narrative has clearly changed. Lots of evidence around us. Yesterday the BIS, the umbrella organization, announced the launch of a global innovation hub in Basel,Hong Kong, and Singapore to help Central Banks to “identify relevant trends in technology, supporting these developments where this is consistent with their mandate, and keeping abreast of regulatory requirements with the objective of safeguarding financial stability”.

The EU is very serious about supporting Blockchain technology. Tom Lyons announced the Convergence conference this coming November sponsored by the European Commission, the EU blockchain observatory & Forum, Consensys, Alastria, and INATBA[1].

Several speakers and panelists participated at the Cryptovalley Conference from Central banks around the world. Of course, they repeatedly stated that they share personal opinions and not the CBs official position. Between the BOE, the Fed, the SNB, and the Bank of Italy, the conversations went deeper.

We were reminded that unconsciously we are going back to the 19th century when multiple entities issued money. I like to add to that observation that we are also going back to bearer instruments. Tomaso Atse, director of the UCL Center for Blockchain Technologies, pointed out that what is new in our era is programmable money and the creation of hybrid types of value (like combining digital identity with money or some other value) and the ability to exchange it).

Alexander Lipton, the EPFL visiting professor and founder of SILAmoney, poked and provoked and defended his point of view. In a nutshell, he is the godfather of the DLT version of Narrow Banking concept. This is a way for Central banks to deploy DLT technology by issuing a fiat-backed digital coin (FBDC). The idea is that the central bank will allow and work (indirectly) with a consortium of validators that manage the issuance of the FBDC. It is worthwhile reading about this concept `Narrow Banks and Fiat-backed digital coins` by Alexander Lipton, Alex Pentland, Thomas Hardjono (MIT). What jumps out of it is that right now, we are faced with Facebook intending to implement this kind of concept through the LIBRA association. While each Central bank is doing its in-house due diligence, concerned only with its local country monetary policy and reserves; there is a clear need for Central banks to get together. They should be designing a Central bank coordinated narrow bank consortium.

This is a wakeup call to nightmares of whether Central banks will be able to control reserves and rates on reserves if LIBRA scales. LIBRA`s adoption in countries with currency instability, is troublesome if it really scales. Can LIBRA create hyperinflation in Venezuela? Alexander Lipton, says yes.

The narrative has clearly changed, and we are shifting in a phase where understanding monetary economics is becoming important.

When I raised the question last week about the governance of the LIBRA association (see  here) and whether there could be collusion; I didn’t mean in the DAO technical sense (i.e. more 50% of validators collude and validate an invalid transaction). I meant collusion in terms of decisions about, for example, the management of the LIBRA reserve fund. Which currencies will be included, will the fund become a significant holder of US debt, how much government debt versus currencies, why share the interest of this cash cow by accepting new members, how to deploy the profits of the reserve?

Once the LIBRA reserve scales to $100billion (Ant Financial`s money market fund is currently $168billion down from a high of $250billion), the interest will be in the order of $1.5billion (assuming an average 1.5% interest rate). That is huge for an association with no reporting requirements.

We live in very interesting times.

Monetary policy issues need to be understood better.

Moral hazards are lurking everywhere.

Those that have been working on financial inclusion, self-sovereign identity, P2P protocols are feeling looted.

  • Why didn`t Facebook join the Decentralized Identity – DID- project (media report that they were invited and rebuffed an invitation)?
  • Why isn’t Facebook`s Calibra, the ID part of the LIBRA ecosystem, respectful of the open standards for verifiable credentials developed already by DID under the auspices of the World Wide Web Consortium (W3C)? Why do they want to design new ones?
  • Will this world domination-ish attitude, shoot them in the foot[2]?

Back to the native people, Lisa Nestor from the Stellar foundation, shared a great overview of the global P2P network that can be used by banks to work directly with each other, without the need for correspondent banks. Stellar is decentralized and open with 28 nodes currently. Their aim is to optimize cross-border payments and work with all currencies. They launched in 2014. In 2016 they had 9,000 accounts and today they have 3.2million. Their daily volume has reached $350k with a total cost of processing of $1.50! During the conference, they reported that the first Swiss node was launched.

Bitcoin Suisse announced that they are seeking a banking license and they will be expanding in Europe. Ficas, a Swiss crypto asset management group for HNW, was a platinum sponsor. They are based in Zug with presence in Turkey, Greece, Spain, and Australia.  Flovtec and Ovrium shared the award of the best Swiss Blockchain company at the SICTIC investor event during the conference. Orvium is a decentralized scientific collaboration platform for deploying blockchain and artificial intelligence technology. Flovtec is a liquidity provider for tokenized assets.

My opinion is that we will be seeing an explosion of stable coin issuance. CNNmoney Switzerland was at the Cryptovalley conference taking a pulse on  LIBRA (watch here).

The GOSCI  – Global Open Source Currency Index- is a novel independent volatility benchmark for Stablecoins. Launched by Bernard Lunn the same day the LIBRA white paper hit the market. Become part of it.

The Stablecoin.foundation was launched in October 2018 with 25 Stablecoin issuers from 16 countries. Its mission is to represent the collective interests of Stablecoin issuers to unify the industry.

Closing remarks

The narrative is now, about financial stability with privately issued coins. Several factors are forcing everyone to the table. These conversations are hard and consensus is not given.

Stable coins are creating a very collateral hungry market situation.

[1] INATBA is the new International Association for Trusted Blockchain Applications, offers developers and users of DLT a global forum to interact with regulators and policy makers and bring blockchain technology to the next stage.

[2] “That’s very world domination-ish of them,” said Kaliya Young, a co-author of “A Comprehensive Guide to Self Sovereign Identity” and co-founder of the Internet Identity Workshop. “Some of us have been working on that problem for a really long time. You already have a set of open standards for verifiable credentials that are basically done and working.” From the article `Buried in Facebook`s LIBRA paper, a Digital Identity Bombshell`

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

 I have a commercial relationship with Flovtec. I have no positions or commercial relationships with any other company or the people mentioned. I am not receiving compensation for this post.

 Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

advisers, cross-border, Daily Fintech Advisers, free agents, Payments, stablecoin

Globcoin GLX StableCoin to power payments for the Daily Fintech SmartExpert service.

glx smartexpert.001.jpeg

The Daily Fintech SmartExpert Service is an easy engagement model for our advisory services. Now you can start working with us by simply choosing your expert, paying for the hour and scheduling your call with the Expert.

In this post we unpick that simple phrase “paying for the hour” and explain why we decided to innovate on that front by partnering with one of the next generation of StableCoins for payments rather than simply using the credit card rails and what we learned from that experience. We like to write about payments innovation. With this partnership we are testing our theories in the laboratory of the real world and making that experience available to our readers.

In this post we will describe:

  • Why we are using a cryptocurrency for payments, rather than relying on the legacy credit card rails.
  • Why we use a StableCoin rather than Bitcoin or any other Tokenomics funded cryptocurrency.
  • Why we chose the GLX StableCoin
  • What we learned during this project.

For our big picture view on why StableCoins are so important (but also so hard to get right), please read this update to The Blockchain Economy digital book that was published on Saturday.

Why we are using a cryptocurrency for payments, rather than relying on the legacy credit card rails.

First, we do offer legacy credit card rails as an option. If you are not comfortable using cryptocurrency, just use Paypal.

Second, we like to test our theories in the laboratory of the real world. Back in April 2017 Daily Fintech articulated the thesis that Bitcoin Will Move From Darknet Early Adopter Niche To Clearnet Mainstream:

“This will happen first among free agent, knowledge workers who offer digital products/services cross border.“

“Free agent, knowledge workers who offer digital products/services cross border“ describes the Daily Fintech SmartExpert service. Now it is time to test that theory in the laboratory of the real world.

Third, it just makes practical sense in a borderless world for DailyFintech’s global subscribers and Experts. Once you really look at how cross border payments work using legacy bank and credit card rails, you see three big practical problems:

  • Problem 1 =  FX costs. Including spread, real FX costs are often over 10%. Consumers can see the fees quite easily, but the spread is pretty hidden. You don’t see the spread unless you look up the interbank rate at that precise moment in time that you get money from an ATM or pay via a credit card in a foreign currency. It is now possible to do this using mobile phones, Google and currency pairs. It is possible to stand in front of an ATM, Google a currency pair such as CHF GBP (if arriving in UK from Switzerland or vice versa) and compare the Interbank rate with what the machine gives you. I have done this, but unless you geek out on obscure Fintech subjects you probably won’t do this.  Bank and credit card networks have been very good at isolating consumers from the problem, but if merchants have to pay they will pass on those costs to the consumer; it is a real albeit hidden cost.
  • Problem 2 = Fraud is an existential threat for Merchants getting paid by Credit Card. Fraud can destroy a small-business owner with a momentary lack of attention. If Merchants accept payment from a stolen credit card, they will a) not get paid for the product they sold b) banks may look for additional reimbursement for permitting the transaction and c) payment processors may terminate their account and put them on a blacklist; the latter can be the death knell of a small business. In contrast, cryptocurrencies enable a simple irrevocable payment or can be done using smart contracts and the equivalent of an Escrow service; either way, it is not an existential threat to the merchant.
  • Problem 3 = Returns. That is why our thesis is that change will come first from digital products/services where there is no physical product to deliver/return.

Our theory is that change will be driven by Merchants not Consumers, because Merchants have the motivation. We decided to test this theory by offering payment for the Daily Fintech SmartExpert Service using a StableCoin.

Why use a StableCoin rather than Bitcoin or any other Tokenomics funded cryptocurrency.

in a word – volatility. When we first started thinking about how to do this, we planned to use Bitcoin and we created a clever (but, in hindsight,  overly complex) way to deal with the volatility problem. When we discovered  StableCoins, we saw that we did not need a complex way to deal with the volatility problem. The complexity of explaining how we dealt with Bitcoin volatility would have created friction that would have impeded the chances of success for the Daily Fintech Expert Service.

So much for Bitcoin. What about all the Altcoins that offer quick, low cost payments? They solve the speed and fees problem very well, but they do NOT solve the volatility problem. Any cryptocurrency that is funded through Tokenomics has an inherent volatility problem. The venture and their early investors want the price of the coin to rise and some traders bet against it rising; the push and pull of these bulls and bears creates volatility.

What is needed is something that is a) a cryptocurrency b) non-volatile by design. In short we need a StableCoin. For more on Stablecoins, please see this chapter of The Blockchain Economy Book

The next question was – which StableCoin?

Why we chose the GLX StableCoin

GLX is a StableCoin issued by a company called Globcoin.

We chose the GLX StableCoin for 5 reasons:

  • Basket not single Fiat. In the chapter on Stablecoins in The Blockchain Economy Book we describe the difference between Single Fiat and Basket. Single Fiat typically means US Dollar (but could be EUR or any relatively stable Fiat currency) but many big corporates and investors prefer a basket that is less volatile than a single currency. GLX is a basket of 15 currencies plus Gold that together account for more than 80% of the World Economy; this is less volatile than even the famously stable Swiss Franc.
  • Fiat Collateralized The book also describes three forms of collateralization (ie what proves that the StableCoin really is worth what the promoters say it is). Those three forms are Fiat, Crypto and Issuer Collateralised. The book describes why Fiat Collateralised (sometimes called the tech lite/audit heavy model) is the most secure. GLX is Fiat Collateralised.
  • Experienced team. A StableCoin that is a) Basket b) Fiat Collateralised is easy to say. It is much harder to achieve in practice. The team behind GLX Globcoin, led by Helie d’Hautefort, has decades of sophisticated currency management experience before the Blockchain era. Helie started his career as a currency option trader in New York. He joined the Peugeot Citroën group in Geneva, where he was in charge of currency hedging. In 1998 Helie founded Overlay Asset Management, the first european currency management business offering currency overlay services, managed accounts and pooled fund programmes. By 2012, in partnership with BNP Paribas, the business had grown to over USD 23b of assets under management, with a client base from 16 different countries. Since 2010 Helie has focused his research on the creation and management of the Global Reserve Currency Index, an innovative systematic virtual currency that mirrors the world global economy. In 2014 he created Globcoin to extend the scope of client users thanks to Blockchain technology. Helie has built an experienced team based in Switzerland and London that can manage a StableCoin that is a) Basket b) Fiat Collateralised.
  • Globcoin card. If you get paid in a cryptocurrency, you want to be able to spend the money. You may decide to save some, but it is unlikely that you want to save 100%. If cryptocurrency remains in it’s pre-chasm phase, you might get paid 10% of your income in cryptocurrency and save it because a) 10% is a good saving rate b) you are a long term bull on cryptocurrency. On the other hand if cryptocurrency crosses the chasm to the mainstream and you get paid say 80% of your income in cryptocurrency you might choose to save 10% and spend 90%. One simple way to spend is via a PrePaid Debit Card and that is one of the services offered by Globcoin. For more on prepaid debit cards please see this post.
  • Regulatory Framework in Switzerland. StableCoins attract the attention of regulators because a) they are sometimes deposit takers and b) they can facilitate the on/off ramps from/to Fiat/Crypto. The question  is – which regulator in which jurisdiction? GLX is based in Switzerland which is interesting for two reasons:
    • FINMA (the Swiss financial regulator), regulates Tokens depending on their use case and has a specific regulatory framework for payments.
    • Switzerland is legally a multi-currency country. What? We all know Switzerland is multi-language, but we also know the famous Swiss Franc. It turns out that there is an alternative currency called WIR that was set up in 1934 that is quite legal. The WIR was set up by people wanting to create an alternative to a financial system that had failed so dramatically in 1929. This has echoes from 2008 and the Satoshi Nakamoto White Paper. WIR accounts for a tiny % of Swiss GDP but it is real and it is legal. So the idea of adding another legal currency was not too big a stretch. That is why you can pay taxes in Bitcoin in Switzerland and buy Bitcoin at any railway ticket machine. It is also why a StableCoin that plays by the rules can be a legal currency in Switzerland.

In fact, in full disclosure, I like Globcoin so much that I agreed to join their Board and help make things happen for them.

What we learned during this project.

  • Don’t make it hard to do business with us. That is why we also offer a Paypal option if you are uncomfortable with cryptocurrencies. We think that many Daily Fintech readers will want to learn from the experience of using a StableCoin for payments, but not everybody.
  • There is still friction in the on-ramp and off ramp due to regulators and AML/KYC. We filled in more forms than we wanted to, but that is life in crypto land today.
  • The crypto world really is easier, once you get started. Gen Z and later will use cryptocurrencies and tokens without thinking, as easily as how we now use email. For those of us who grew up with Legacy Finance, we have a transition to go through.  It is a bit like learning to ride a bike – a) easier to learn when you are young b) a lot more efficient once you are past the learning curve. Part of our mission at Daily Fintech is taking big complex subjects and making them understandable. Our written materials are always free, but if you want a more personal trainer type of service (where we explain just what you want to know in your context) please book an hour of our time using the Expert Service – and pay using a StableCoin.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Bitcoin & Blockchain, Blockchain, Central Banks, cross-border, digital currencies, MAS, Payments

World’s first Central Bank Digital Currency payment successful- MAS lead the way

The Monetary Authority of Singapore (MAS) have been piloting several Blockchain use cases over the past few years. Central Bank Digital Currency (CBDC) was one of the key focus areas of Project Ubin – MAS’ Blockchain initiative. In September 2018, I had published my post on Singapore and their efforts around Blockchain.

With the five phased approach to Project Ubin, we may soon see a state issued digital currency. That would not only put Singapore ahead of its Asian peers, it may be a Global first.

Image Source

We now have a global first. Just over a week ago, MAS and the Central Bank of Canada made an announcement that a transaction between digital currencies of the two central banks was executed successfully. The trial was performed with the help of Accenture and J.P.Morgan.

As the Blockchain narrative developed over the years, one of the key buzzword was decentralisation and disintermediation. However, in the last two years, we have seen permissioned Blockchains gain popularity.

The three dimensions of the Blockchain Trilemma proposed by Vitalik Buterin were, Scalability, Security and Decentralisation. Designers of Blockchain systems have to choose between these three dimensions. The rise of permissioned Blockchain indicates that Decentralisation would be the first to be compromised amongst the three dimensions.

There are several reasons why a central bank would launch a digital currency. In the case of the Petro, the rationale was largely to stay clear of sanctions and raise capital to pay back some of their debt.

Reserve Bank of India on the other hand is exploring CBDC as it would be a low hanging fruit after the mass (forced) adoption of the nation’s identity system – Aadhaar. A good model would be to link a CBDC to Aadhaar verified wallets to create accountability and traceability of cash in the economy.

RBI was also spending 7 Billion Rupees ($100 Million) per year in just creating and managing the Rupee. There would be huge savings if they launched a CBDC.

Getting back to the SGP digital currency. Some key points to note are the following,

  • The exchange transaction happened between SGD and CAD.
  • The MAS network was built on the Quorum Blockchain and the Canadian network was on Corda.
  • The principle of Hash Time Locked Contracts (HTLC) was used to ensure an all-or-nothing guarantee. If one leg of the transaction fails to complete, the entire transaction is rolled back.
  • Interledger protocols can be used if parties were on different Blockchain networks.
  • Off-Chain transfer of hash were performed to initiate and complete the transactions.
  • The asset swap was performed using an intermediary, and a multi-currency support option was modelled in using this infrastructure.
Image Source

The picture above explains the HTLC framework used by this model. A report was published at the back of this initiative, describing several models that cross border settling systems could use.

The next wave of central bank blockchain projects can make further progress by bringing technology exploration together with policy questions about the future of cross-border payments

Sopnendu Mohanty, Chief Fintech Officer, MAS

The report also goes into the depths of the challenges in using HTLC and the potential alternatives being worked on by the Blockchain community. Like in most other Financial Services use cases of Blockchain, this transaction was also executed in a controlled environment.

CBDC are still in their infancy. This pilot could be followed up by collaboration across several central banks at the policy, governance, process and infrastructure levels. This would benefit the global economy at a scale never seen before. Let’s take stocks in a year. Watch this space.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).