Tag Archive for: payments

Wordt de invoering van sterke klantauthenticatie een drama?

| 30-08-2019 | ENIGMA Consulting |

Sinds enige tijd waart er een spook door de wereld van het Europese online betalings­verkeer: sterke klantauthenticatie (strong customer authentication). Webwinkeliers vrezen conversieverlies door afhakende klanten in het afrekenproces. Betaaldienst­verleners worstelen om op tijd klaar te zijn met de implementatie. En consumenten vragen zich af of het allemaal wel nodig is. Pieter van Stempvoort, senior consultant bijEnigma Consulting, over de naderende invoering van de nieuwe betaalwet.

Volgens het ‘Fifth Report on Card Fraud’ van de ECB bedroeg de financiële schade als gevolg van kaartfraude in Europa in 2016 zo’n €1,8 miljard. 73% daarvan werd veroorzaakt door zogenaamde card-not-present betalingen en deze categorie was de enige die een stijgende trend liet zien ten opzichte van het voorgaande jaar. KPMG bevestigt in zijn ‘Global Banking Fraud Survey’ van mei dit jaar de stijgende trend van card-not-present fraude, als ook van cyber/online fraude in 2017-2018 in alle regio’s van de wereld, waaronder Europa.

Brussel zag in deze ontwikkelingen aanleiding om sterke klantauthenticatie in de Europese betaalwetgeving te verankeren, met als doel online betaalfraude en misbruik van rekening- en betaalgegevens tegen te gaan en het consumentenvertrouwen in de Europese betaalsystemen te borgen.

Sterke klantauthenticatie

Het begrip sterke klantauthenticatie (strong customer authentication) werd geïntroduceerd in de herziene Richtlijn Betaaldiensten (Payment Services Directive, afgekort PSD2). De richtlijn schrijft voor dat bij online betalingen en mobiele en kaartbetalingen aan de kassa de betaler zich onder voorwaarden moet authenticeren middels twee of meer van de volgende factoren:

  1. Kennis (iets dat alleen de betaler weet, zoals een wachtwoord of pincode);
  2. Bezit (iets dat alleen de betaler heeft, zoals een smartphone of e-identifier);
  3. Inherente eigenschap (iets dat de betaler is, zoals een vingerafdruk of gezichtsherkenning).

Deze zogenaamde 2-factor­authenticatie is ook verplicht bij het verkrijgen van online toegang tot een betaalrekening en bij het gebruik van de door PSD2 mogelijk gemaakte betalingsinitiatie- en rekening­informatiediensten.

2 factor authenticatie

De Europese Bankautoriteit (European Banking Authority, afgekort EBA) heeft het één en ander verder uitgewerkt in Regulatory Technical Standards (RTS). Deze Europese regulering wordt per 14 september onverkort van kracht. Om onduidelijkheden in de RTS weg te nemen publiceerde de EBA afgelopen juni een uitgebreide toelichting, waaruit onder meer duidelijk wordt hoe de verschillende factoren kunnen worden geïmplementeerd en welke implementaties niet aan de PSD2 en RTS voldoen.

Uitzonderingen leiden tot complexiteit

De RTS beschrijven verschillende uitzonderingen die het mogelijk maken om de stap van sterke klantauthenticatie over te slaan. Een juiste en volledige implementatie van deze uitzonderingen kan dus zorgen voor minder frictie in het afrekenproces.

Sommige van deze uitzonderingen, zoals een bedraggrens bij online betalingen en contactloze betalingen aan de kassa, zijn relatief simpel in te voeren. Andere uitzonderingen zijn echter meer complex om te implementeren. Eén van de meest ingewikkelde uitzonderingen is de mogelijkheid om sterke klantauthenticatie over te slaan bij online betalingen met een laag frauderisico. Die uitzondering vereist een voortdurende toetsing van het frauderisico van betalingen aan de normen uit de RTS, op basis van een uitgebreide analyse van het transactierisico van de betaling en het betaalgedrag van de betaler.

De beslissing of sterke klantauthenticatie in voorkomende gevallen terecht niet is toegepast ligt uiteindelijk bij de bank van de betaler. En dat bemoeilijkt de implementatie van uitzonderingen bij bijvoorbeeld webwinkeliers nog verder.

Spanningsveld

De introductie van sterkte klantauthenticatie creëert een spanningsveld tussen betaalgemak en fraudepreventie. Met name webwinkeliers vrezen dat de toepassing ervan voor conversieverlies gaat zorgen, doordat klanten afhaken in het afrekenproces. Begin dit jaar deed onderzoeksbureau 451 Research in opdracht van betaaldienstverlener Stripe onderzoek naar de impact van sterke klantauthenticatie op de Europese online economie. In zijn rapport ‘The impact of SCA’ noemt het bureau een negatief effect van €57 miljard in de eerste twaalf maanden na de invoering. Dat is maar liefst 9,6% van de door het bureau geschatte €592 miljard online omzet in de EU in 2019.

Wellicht valt het negatieve effect in Nederland nog wel mee. Het merendeel van de Nederlandse online aankopen (59% in 2018) wordt immers gedaan met iDEAL, dat al gebruikmaakt van 2-factorauthenticatie. De Nederlandse consument is dus al aan sterke klantauthenticatie gewend. Maar zelfs als we de cijfers van 451 Research halveren zou de financiële schade door frictie in het afrekenproces Europa-breed in de miljarden euro’s kunnen lopen.

Geen uitstel

Een probleem is dat veel partijen niet op tijd klaar lijken te zijn met hun voorbereidingen op sterke klantauthenticatie. Het rapport van 451 Research stelt dat 1 op de 5 bedrijven met minder dan 100 werknemers nog niet bekend is met de ins en outs en dat slechts 8% goed is voorbereid. Van de bedrijven met meer dan 5.000 werknemers is dat 1 op de 25 respectievelijk 19%. Om maar niet te spreken over de consument zelf: volgens het rapport is 73% niet op de hoogte van de nieuwe regels.

Geen sterke klantauthenticatie nodig bij

Eind juni kwam de EBA een beetje tegemoet aan de zorgen rondom de tijdige invoering, door te stellen dat partijen ‘op uitzonderingsbasis’ beperkte extra tijd voor de implementatie kunnen nemen, zodat ongewenste negatieve gevolgen voor de gebruikers van betaaldiensten worden voorkomen. Zij benadrukt echter dat er geen sprake is van uitstel.

Maak een strategie en voorkom drama

Al met al is er inmiddels geen ontkomen meer aan de implementatie van sterke klantauthenticatie. De invoering ervan behoeft beslist aandacht, maar hoeft geen drama te zijn:

  • Voor bedrijven die online betaalmogelijkheden bieden is er weinig aan de hand als zij gebruikmaken van één van de grote PSP’s. Deze zijn immers geheel op sterke klantauthenticatie voorbereid.Voor deze bedrijven is het wel van belang om na te gaan of de bij de PSP afgenomen betaalmethoden die zij aan hun klanten binnen de EU/EER aanbieden, voldoen aan de eisen uit de RTS. Met name voor betaalmethoden met creditcards en betaalkaarten is het belangrijk dat deze gebruikmaken van 3D Secure 2. Dit is de nieuwste versie van de 3D Secure-standaard, die door alle grote kaartmerken wordt ondersteund. In tegenstelling tot de eerste versie, maakt 3D Secure 2 naadloze integratie van 2-factorauthenticatie in het afrekenproces mogelijk en kan het frictie in dit proces tot een minimum beperken.Daarnaast is het een enorm pluspunt als de PSP zelf actief de uitzonderingen op de toepassing van sterke klantauthenticatie managet. Hiertoe behoren ook het analyseren van het transactierisico en monitoren van de uitgevoerde betalingen en het managen van de ontheffing van sterke klantauthenticatie bij online betalingen met een laag frauderisico.
     
  • Voor aanbieders van betalingsinitiatie- en rekeninginformatiediensten is het van belang om voor de interactie met de banken aan te sluiten op een breedgedragen interface-standaard. Terwijl er inmiddels een veelheid aan zogenaamde API-standaards is ontstaan, valt de NextGenPSD2-standaard van de Berlin Group op door de brede ondersteuning door zo’n 2.500 banken in 24 landen.NextGenPSD2 lijkt derhalve een goede kandidaat voor de implementatie van sterke klantauthenticatie in het kader van deze diensten. De standaard ondersteunt verschillende modellen om de authenticatie in samenwerking met de bank van de betaler uit te voeren, maar geen van de modellen wordt door álle banken ondersteund. Voor een echt pan-Europees bereik zullen deze aanbieders dus alle modellen moeten implementeren en per bank het juiste model moeten kunnen aansturen.

Auteurs: 
Pieter van Stempvoort, Enigma Consulting, Expert Consultant

 

 

ENIGMA Consulting

 

 

CSDs have a role to play in a blockchain environment

| 12-08-2019 | Carlo de Meijer | treasuryXL

There is a broad consensus amongst the post-trade industry that blockchain technology will revolutionise the securities post-trade world and could radically change how assets are maintained and stored by custodians and central securities depositories (CSDs).

Blockchain technology may enable real-time settlement finality in the securities world. This could mean the end of a number of players in the post-trade area, such as central counterparty clearing houses (CCPs), custodians and others. For a long time, also central securities depositories (CSDs), as intermediators in the post-trade processing chain, thought they also could become obsolete.



This idea however is changing. While CSDs are making up their mind on their future position in the blockchain world, they are increasingly considering blockchain as enabler of more efficient processing of existing and new services, instead of a threat to their existence. But what will be their future role?

Complex/fragmented post-trade infrastructure

As we all now, the current post-trade infrastructure is highly complex and fragmented. Much of this complexity and fragmentation is the result of the various intermediaries needed in the post-trade process. They include players like banks, brokers, stock exchanges, central counterparty clearing houses (CCPs), central securities depositories (CSDs), real-time gross settlement (RTGS) systems and custodian banks.

In the current set-up of the post-trade environment, important record-keeping functions, such as those relating to the issuance, settlement, registration and safekeeping of securities, are performed centrally by different specialist intermediaries. Intermediaries also perform the post-trade servicing of assets, such as crediting dividend payments or bonus issues to client accounts, or managing rights issues and takeovers.

They are thereby dealing with siloed outdated legacy systems and technologies each having their own ledger that are not good communicating with each other.  Consequently, they spend much time and resources on reconciliation and risk management. As a result settlement currently takes two or more days in many places, involving high risks and high costs for transacting parties.

The present role of CSDs

Situated at the end of the post-trading process, CSDs are systemically important intermediaries. They thereby form a critical part of the securities market’s post-trade infrastructure, as they are where changes of securities ownership are ultimately registered.

CSDs play a special role both as a depository, involving the legal safekeeping and maintenance of securities in a ‘central depository’ on behalf of custodians (both in materialised or dematerialised form); as well as for the issuer, involving the issuance of further securities by issuers, and their onboarding onto CSDs’ platforms.

CSDs are also keeping a number of other important functions, including: dividend, interest, and principal processing; corporate actions including proxy voting; payment to transfer agents, and issuers involved in these processes; securities lending and borrowing; and, provide pledging of share and securities.

Blockchain: disruption in securities post-trade

Prospects
DLT offers the prospect of rationalising and combining post-trade activities in one single action, offering safer and cheaper record-keeping, as well as more seamless securities issuance. They thereby may create significant cost savings and efficiency gains across the securities market’s post-trade infrastructure.

  • Blockchain is linking trading partners directly. That means everything will be in place in the ledger at the time of the transaction.
  • With DLT, all of the complex systems and processes to transfer cash and equities from one account to another are not required. Everything can be embedded into the blockchain.
  • Institutions will no longer have to maintain their own databases, as with DLT there will be only one database for all participants in the transaction (so no more fragmented islands of information).
  • This will heavily ease the reconciliation process, allowing increasing transparency and efficiency in a presently highly fragmented industry.
  • It could permit the direct or real-time settlement of transactions between accounts, the simultaneous verification of transactions and the registration of ownership, and the direct and automated payment of entitlements to accounts.
  • As a result, buyers and sellers can match transactions in seconds and all parties are aware a transaction has been done.

Disruption
On the other hand, DLT has the potential to heavily disrupt existing post-trade processes in financial services. Shared ledgers of ownership promise to revolutionise the post-trade infrastructure, Thereby impacting the business model of a number of intermediaries.

Use of a blockchain network would automate the process further, with completely integrated authentication and transparency of the transfers themselves. As a result, clearing and settlement can be transformed into a single process, in which digital and digitised assets are delivered against payments instantly, thereby removing the need for a market infrastructure provider to hold a security, or token in its own physical or electronic vault.

The extent to which blockchain will disrupt existing processes in financial services is still unsure. Some say a complete disintermediation of middle and back office processes is under way, removing most (or even all) intermediaries from the post-trade processes.

Others however say the impact of this emerging technology will be less forceful, with a (limited) number of existing intermediaries to play an important though somewhat different role.

CSDs changing attitude

What is sure is that for some actors in the securities post-trade world, DLT will completely replace their businesses or even make the work of some intermediaries such as CCPs and custodians redundant. Others will still be needed, but they should question what will be their added-value within future DLT services, such as CSDs.

CSDs are changing their viewpoint on DLT including blockchain. Instead of seeing blockchain as a threat to their existence, they are now also considering them as (potential) enabler of more efficient processing of existing and new services.

“CSDs could have an important role to play in a blockchain-based settlement system. As ‘custodians of the code, CSDs could exercise oversight of, and take responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts.” Euroclear Report

CSDs are believed they will continue to perform an important role as trusted, centralised financial market infrastructures (FMIs), providing gatekeeping services and oversight of the relevant blockchain.

How are CSDs reacting?

Recognising the threat as well as the opportunities of blockchain to their current services, a group of CSDs across the world has been working together and with regulators to define their future role in the blockchain post-trade environment. By working together they will ensure that CSDs from each region are represented, potentially unleashing (unimagined) network effects.

Aim of this cooperation is to explore how blockchain could be used for post-trade processes, identify, define and develop use cases in the securities depositories’ industry (including smart contracts and digital assets), and identify how existing standards could support it.

Another  group of 30 central securities depositories (CSDs) in Europe and Asia are researching possible ways to “join hands” in developing a new infrastructure to custody digital assets. The CSDs will attempt to figure out how to apply their experience in guarding stock certificates to security solutions for crypto assets.

“A new world of tokenized assets and blockchain is coming. It will probably disrupt our role as CSDs. The whole group decided we will be focusing on tokenized assets, not just blockchain but on real digital assets.”

These CSDs clearly see an opportunity to apply their knowledge and skills to the crypto currency space, where “losing your private keys means losing your coins forever”. The group’s focus is looking at how to protect these keys for crypto investors, and how the tokenization of “everything stands to change everything”. The next phase of the research will also involve some large custodian banks.

CSDs future role in a blockchain environment

There are various reasons why CSDs may continue to play a role in the post-trade bklockchain environment. That is not that strange as the primary functions of CSD may run parallel to many of those that emerge from the blockchain technology. CSDs are aware that some of those roles will neatly fit into their natural infrastructure. But there will also be some activities that will become obsolete.

Looking at the roles that could be suited for CSDs, those would be anything around safety, notary and governance.

1. Notary function
Blockchain may enable tokenisation of assets and the use of smart contracts. All these are new components in the value chain. This may mean that a digital actor will be needed to manage this tokenisation, and creation and maintenance of smart contracts, overseeing the entire securities token ecosystem. CSDs could fulfil this notary function.

1a. Asset tokenization
Asset tokenization is the representation of assets on the blockchain in the form of tokens, which are designed to be unique, liquid secure, instantly transferable, and digitally scarce – and therefore impossible to counterfeit.

In a world where securities and other assets become tokenised, some have argued that an intermediary will still be needed to issue them and create rules. Tokenised assets exchanged on a distribute ledger may still require CSDs to hold the equities, which the token represent. They would thereby fulfil the crucial notary function, both as tokenising agent and as operator of the escrow accounts in which the real assets are hold.

1b. Custody of private keys
There may also be a need for secure maintenance of personal encrypted keys. Adopting blockchain technology would allow individuals and companies to have complete control over their assets and data, accessed through a set of private keys that must be kept secure.

Emerging technologies like decentralized key recovery will allow more and more individuals to secure custody of their own assets, thereby removing the artificial and expensive separation between legal and beneficial ownership in most asset markets.

Some will choose to take that responsibility themselves, but many investors may choose to outsource the custody of their private keys and token wallets to the companies and CSDs that can provide an independent and secure safekeeping service for these private keys.

2. Record of title for securities
CSDs could  also be of value to record of title for securities. In many cases, the law mandates how title to property transfers. EU regulations state that for “any financial instrument to be transferable and tradable”(i.e. takes place on a trading venue, exchange or multilateral trading facility), securities must be recorded (registered) in book entry form in a CSD.

Under the current law, to enable having a blockchain-based system of transfer of title to securities, the blockchain would need to be the system that the CSD operates, which is not truly distributed.

Or one would need to create a new legal regime that recognizes that the transfer of title on a blockchain is effectively a transfer of title to the relevant property, and allows that in the context of securities trading. But that would take a lot of time to realise.

As a solution, the blockchain technology can be implemented through a hybrid model in which the CSD can either operate a blockchain platform itself to perform the book entry role. Or it can continue to perform this role off-chain, with the third- party blockchain platform accessing those records held by the CSD via an API (application programme interface).

3. Governance
CSDs could also play the governance role in a DLT based system – to ensure that what happens within their systems is unchallengeable. The movement from a post-trade system based around the existing infrastructure to a DLT-based system, without updating the regulatory and legal regime, could introduce a new systemic risk into the financial system. Regulators and legislators are unlikely to be comfortable in allowing the wholesale replacement of the existing infrastructure with DLT-based solutions.

CSDs are best placed to retain a ‘policing’ or governance role in a blockchain framework. This role should be the management of an insolvency of a party, particularly if there is a position that is not settled and the relevant contract is not yet completed. The involvement of CSDs in a governance and operational role could help increase trust of investors, and raise the quality of the blockchain ecosystem infrastructure underpinning these new asset classes.

4. Trusted gatekeeper: Authorisation and administration
CSDs could also be of help as trusted gatekeeper to DLT networks. While regulators will set the standards for admission to the network, the admission tests are likely to be administered by other parties. The most likely candidate for that role of trusted gatekeeper to DLT networks are the CSDs.

They are already the “first home of financial assets issued, and guardians of the integrity of every issue they accept”.

“The regulators are unlikely to want to immerse themselves in the operational details of the authorisation process.” “They will sub-contract that work to a trusted intermediary (read CSD).”

5. Other roles

A. DLT proxy voting system
One role in the post-trade environment that is already intensively investigated by CSDs is the management of a DLT-based e-proxy voting system. This would include providing general meeting services and give shareholders an easy, user-friendly and secure tool for voting remotely.

There is potential for improvement for instance in respect to the depots of voting rights. The system would automatically allow (or disallow) voting privileges for members based on what voting rights they had within a particular organization.

By using open source blockchain technology the efficiency and integrity of the Annual General Meetings and shareholder voting processes can be increased. Given that it is an end-to-end solution – from the time a meeting is announced and all the way through the voting process to the publishing of results – it means that all stakeholders will truly benefit within the process.

“By leveraging blockchain, we are able to reduce friction in the voting and proxy assignment process and also ensure that all information is transparent to stakeholders when required and with the proper security, governance and risk procedures in place.”

B. Elective corporate actions
CSDs could also have a role to play at elective corporate actions.  Corporate actions recorded by the ledger may include paying out dividends, splits, issue of rights, warrants, pay-ups etc.

The user group for a permissioned blockchain network can choose who should validate these actions. They could simply give validation rights to every node. Getting issuers to publish elective corporate actions, such as rights issues and proxy votes, directly onto a blockchain, however might be a difficult step to realise.

Alternatively, this could be the role of a trusted third party, or a combination of both a trusted party and the nodes. This would imply a logical role for CSDs, creating a common registry of ownership associated with an ID.

C. Reconciliation
CSDs could also be of help in the reconciliation process. Blockchain may certainly help automate other components of the settlement process, such as reconciliation. A DLT-based reconciliation tool, with multiple trading firms participating in a record-based system, however could still occur within the CSD, which may act as the single point of reference for reconciling the various records.

D. Cross-border collateral mobilization
A final area where CSDs could play a role is in cross-border collateral mobilisation. Leveraging blockchain technology could overcome existing hurdles when moving collateral across various jurisdictions, making the transfer faster and more efficient.

“Designed to simplify cross-border collateralisation away from using multiple complex and non-standardised links towards smooth movement across various jurisdictions.”

By using CSDs it could enable a centralised, faster and more efficient allocation of fragmented security positions to cover financial obligations of market participants in multiple jurisdictions.

Concluding remarks

CSDs are likely to play an integral role but important role in any blockchain environment. Their role however will look quite different from we know them today. They can be the logical center of the system, custodying the standards, processes and governance of the system.

CSDs will have the opportunity to be agents of change. CSDs however need to adapt to meet new demands asking for delivering added value services in the new blockchain environment.

But they are not there yet! There is clearly a gap between the long-term opportunities presented by blockchain and the challenges involved in making progress.

Several blockchain initiatives in this area have failed, or are just ended their pilot stage or are very limited in scope. CSDs are also not currently building a single solution. Rather, each group is building its own platform designed to interoperate with the others.

There is thus urgent need to leverage existing business standards for the distributed ledger technology application in order to realise a global infrastructure that can smoothly operate cross border.

 

Carlo de Meijer

Economist and researcher

Towards a central bank digital currency?

| 06-08-2019 | Carlo de Meijer | treasuryXL

Since Facebook announced its plans to come up with their own digital currency named Libra, a heated debate has risen about whether central banks should issue their own digital currency.

Central banks worldwide have expressed their worries about Facebook’s plan. According to them the prospect of a tech firm (and may be also others in the future) with billions of users launching its own money potentially poses a threat to existing fiat state currencies and especially to monetary stability.

Long-time sitting at the side-lines, this plan may accelerate the idea of a central bank digital currency (CBDC). Though there are no real plans (yet), are some strong arguments for central banks to start issuing their own digital currency.

This however raises a number of questions such as: What sort of digital currency?; What would be the main arguments? What role should banks play in this process? And, what would be the impact on financial stability?

Central banks counterbalancing Libra

Central bank are seriously watching the emergence of a new global digital currency called Libra, introduced by Facebook (see my Blog: Facebook and Libra: a global digital currency, 1 July 2019). The birth of Libra thereby serves as an “alert” for central banks and regulators.

There is growing belief that if Libra could be successfully launched, it would challenge central banks’ monetary sovereignty, posing a long-term threat to central banks control of money. Any role for Libra beyond the payment function could bring changes to the rules of the global monetary system, and regulators should pay close attention to that possibility.

“From the government’s perspective, we pay more attention to its influence on financial services, monetary policy and financial stability.”

Accelerating the launch of their own digital currencies by central banks could be a counterbalance.

Reactions

The initial cautious stance towards a central bank issued digital currency, ranging from wait-and-see to very negative, has firmly changed. Central banks and governments from all over the world as well as international financial institutions like the IMF and BIS are now sounding a much more positive tone.

IMF

It is interesting to find that already last year (November 2018) the International Monetary Fund (IMF) started to examine the potential innovative nature of digital currencies and has supported CBDC proposals more positively. Christine Lagarde, at that time Managing Director of the IMF, urged central banks to consider CBDC since they could satisfy public policy goals, including financial inclusion, security/consumer protection, and privacy in payments.

BIS

While just a few months ago, Augustín Carstens, the general manager for the Bank for International Settlements (BIS), was still questioning the value of central-bank-issued digital currencies, he recently acknowledged that central banks will likely soon need to issue their own ones.

Carstens warns that “big techs have the potential to become dominant” in this area thanks to network effects. Further, the arrival of such products “might just be around the corner if there is clear evidence of demand from the public”.

 “And it might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies. If Facebook and big tech companies get their way, however they may have to.” Augustin Carstens

BIS is now supporting the many central banks’ efforts to research and develop digital currencies based on national fiat currencies. At the very least, the BIS concludes in its recent report, new “comprehensive” public policy is needed to “respond to big techs’ entry into financial services so as to benefit from the gains while limiting the risks.”

The potential implications of such a change towards central bank digital currencies for the stability of the global financial system however aren’t entirely clear, according to the BIS.

ECB

Though not taking an official position, a European Central Bank (ECB) official has come out generally in favour of wholesale central bank digital currencies (CBDCs).

Vitas Vasiliauskas, a member of the Governing Council of the ECB and chairman of the board of the Bank of Lithuania, said the question is not if but whether CBDCs should be retail, wholesale, or both. A retail CBDC would be available for the general public, while a wholesale version would be restricted to serve a limited circle, mostly financial institutions. In between these two types, “multiple theoretical sub-models also exist,” he said.

PBoC

The People’s Bank of China (PBoC), the country’s central bank is accelerating its efforts to introduce a government-backed digital currency, aiming at “securing a cutting-edge position in the global cryptocurrency race”. The central bank is organizing market-oriented institutions to jointly research and develop a central bank digital currency and the program has been approved by the State Council.

“A digital currency issued by the central bank can improve the efficiency of monetary policy, and help to optimize the payment system.”

China’s monetary authority identifies the nature of digital currency as “a substitute for cash”, rather than a speculative instrument. The use of cash is declining in China amid booming digital payment systems.

The central bank digital currency could be a new monetary policy tool, or an investment asset that carries an interest rate to satisfy investors’ demand for value. It might also be used as a reference for bank interest rates on deposits. The Chinese digital currency also could be used domestically. But “everything is just under discussion”.

Why CBDCs?

There are various arguments raised to issuing central bank issued digital currency based on DLT. The main are described below.

Towards a cashless society

One of the reasons mentioned is that in the Western world a growing number of people do not use cash anymore. Physical payments are thereby gradually replaced with electronic payments. CBDCs could provide a safe, liquid payment instruments to the general public. They have the potential to reduce cash handling costs since all the transactions can be made using a digital representation of money and are traceable.

…. and a formal based economy

A shift in central bank money from cash (physical money) to digital currency is another way to shift the economy from being informal-based to formal-based so that the economy becomes more tax-based, transparent, and efficient. This is especially relevant for emerging markets.

Increased financial inclusion

Another motivation  for especially emerging economies regarding CBDC proposals is financial inclusion. In many of these countries a large number of people are unbanked and/or without access to commercial banks and the internet and thus excluded from conventional banking services. CBDC might promote digitization of the economy and, thus, economic and social inclusion.

More effective monetary policy

Shifting from cash to digital currency through issuing CBDC may enhance the effectiveness of monetary policy (such as a negative interest rate policy under the effective lower bound) because of limiting the scope of cash substitution that could emerge to avoid a negative interest rate.

Implementing CBDCs can allow new monetary policy tools to be used. Alternatively, CBDCs can be used as a tool to increase aggregate demand by making ‘helicopter drops’ of newly created CBDCs to all citizens, making it easier to meet the central bank’s monetary policy target of price stability.

Safer and more effective financial system

And there are the efficiency and financial stability gains to be get from CBDC. CBDC has the potential to improve the existing wholesale financial systems—including interbank payments and settlement systems, delivery versus payment systems, and cross-border payments and settlements systems.

Allowing individuals, private sector companies, and non-bank financial institutions to settle directly in central bank money (rather than bank deposits) may significantly reduce the concentration of liquidity and credit risk in payment systems.

This in turn could reduce the systemic importance of large banks. In addition, by providing a genuinely risk-free alternative to bank deposits, a shift from bank deposits to digital cash may also reduce the need for government guarantees on deposits, “eliminating a source of moral hazard” from the financial system.

Foster fintech sector

The use of CBDCs may promote a technological environment and foster the fintech sector. This is especially relevant for emerging economies. Those economies may find it difficult to develop banking systems and capital markets that are comparable to those in advanced economies. Fintech services are new and innovative.

Encourage competition and innovation

The regulatory framework would make it significantly easier for new entrants to the payments sector to offer payment accounts and provide competition to the existing banks. It would also reduce the need for most smaller banks and non-banks to run their payments through the larger banks (who are able to set transaction fees at a level that disadvantages their smaller competitors).

What sort of central bank digital currency?

When discussing the options of central bank digital currencies we can differentiate proposals into retail CDBC i.e. targeted to the general public and wholesale CBDC issued only for financial institutions. And there are multiple in-between types that may have characteristics of both retail and wholesale.

Retail CBDC

A retail CBDC is one that will be issued for the general public. Retail CBDC based on DLT has the features of anonymity, traceability, availability 24 hours a day and 365 days a year, and the feasibility of an interest rate application.

The retail proposal is relatively popular among central banks in emerging economies, mainly because of the motivation to take the lead in the rapidly emerging fintech industry, to promote financial inclusion by accelerating the shift to a cashless society, and to reduce cash printing and handling costs.

Wholesale CDBC

A wholesale CBDC is for financial institutions that hold reserve deposits with a central bank. It could be used to improve payments and securities settlement efficiency, as well as to reduce counterparty credit and liquidity risks.

A value-based wholesale CBDC would replace or complement reserves at the central bank with a restricted-access digital token. A token would be a bearer asset, meaning that during the transaction the sender would transfer value to the receiver, without intermediaries.

This would be something fundamentally different from the current system in which the central bank debits and credits the accounts without transferring actual values.

The wholesale CBDC is seen as the most popular proposal among central banks because of the potential to make existing wholesale financial systems faster, inexpensive, and safer. The Bank of International Settlements (BIS) also shares the view that wholesale CBDC could potentially benefit the payments and settlements systems.

Some experiments have been already conducted or examined by central banks since 2016—such as those in Canada called “CADcoin” under Project Jasper, Singapore Project Ubin, Japan-Euro Area Project Stella, Brazil, South Africa Project Khokha, and Thailand (Project Inthanon). (See my earlier blogs: Blockchain and Central Banks: A Tour de Table Part I and II, 3 and 9 January, 2017).

Retail versus wholesale CBDC?

Compared to emerging economies, central banks in advanced economies are not enthusiastic about retail CBDC. And that is not surprising. Many central banks do not wish to create competition between central bank money private sector money, taken into account the limited potential benefits from using retail CBDC.

A retail CDBC would be a step too far (or too early) for them. If a central bank issued a digital currency whereby everyone (including businesses, households and financial institutions other than banks) could store value and make payments in electronic central bank money (the r-CBDC variant), this could have wide-ranging implications for monetary policy and financial stability.

Wholesale Central Bank Digital Currency would bring a number of important efficiencies. Besides their retail payments and settlements systems are already highly efficient, almost real time, and always available. Most citizens are banked, while the use of cash in most European countries – with the exception of Sweden and Norway – is still rather high (and not declining in the same speed).

Moreover, wholesale CBDC technology would allow linking to other platforms. Directly linking securities or FX platforms to cash platforms could improve the speed of trades and eliminate settlement risk. Settlement on OTC markets, as well as for syndicated lending and trade finance could speed up considerably if linked live to an instant wholesale CBDC system.

Wholesale CBDC may also simplify (cross-border) payment infrastructure, strongly reducing the number of intermediaries involved. This may improve efficiency and security, minimise liquidity and counterparty risks and reduces cost.

Deploying DLT technology would also allow “smart” features to be added to wholesale CBDC, including earmarking funds, limiting their use in time and place, applying conditional interest rates and others. Such smart features would allow central banks to explore new and powerful operational monetary policy tools, such as tailor-made interest rates.

Finally. real-time monitoring and better track-and-trace options on a unified platform should facilitate both anti-money laundering efforts by banks and supervision over those efforts.

Coordinated CBDC approach

This wholesale approach is a likely first step towards more universal adoption of CBDCs. It is less disruptive and makes global payments cheaper, faster and more secure. But who should take the initiative to build the wholesale CBDC?

Only central banks have the mandate to issue a digital currency or token and call it legal tender. They however lack extensive experience and resources needed to build and maintain such an infrastructure and, build a compliance apparatus to supervise clients and transactions.

The private sector, on the other hand, has the necessary experience and resources to do this. Next to that, commercial banks also have an incentive, as regulation is becoming ever more stringent (KYC, AML), and makes it more costly to maintain a presence in payment systems in multiple countries.

Moreover, the current international payment system, based on correspondent banking, creates various costs such as KYC and handling costs of all banks involved. There are also delays due to opening hours in different time zones while liquidity is trapped in pre-funded nostro-accounts. A single cross-border 24/7 international direct payment and settlement system therefore is very attractive for them.

In order to build a successful wholesale CBDC, one needs the private sector’s experience and the central banks, thereby taking away the various counterparty risks. Moreover, jurisdictional differences need to be harmonised. So international public-private partnerships make sense.

Though this seems controversial, one should keep in mind that the existing monetary system is already a public-private partnership. While central banks determine monetary policy and monitor financial stability, commercial banks actually create most of the money by lending. Central banks (and other government agencies) in turn license and regulate them.

The way forward

Up till recently, not many central banks so far have found strong advantages of issuing their own digital currency at this stage because of several technical constraints.

The potential launch of Libra however has been an important wake-up call for a large number of central banks.

Given that blockchain technology has been progressing fast in the settlement and payment areas (as well as DLT), central banks may now see incentives to increase their interest in wholesale CBDC proposals and consider actual implementation seriously in the near future.

Wholesale CBDC however will still have to compete with upgraded legacy systems. Both central and commercial banks should therefore take a cautious approach when building completely new alternatives. Experimental wholesale CBDC that are cross-border from the start and involve multiple commercial and central banks, should have the biggest chance of success.

A retail CBDC however may be “a faraway goal” because of the potential adverse impact on commercial banks by promoting a shift of retail deposits from commercial banks to a central bank.

 

 

Carlo de Meijer

Economist and researcher

 

Challengerbanken dwingen traditionele banken tot verbeterslag

| 05-08-2019 | ENIGMA Consulting |

Het openen van een rekening via mobiele telefoon wordt steeds eenvoudiger.

Een vooruitstrevende mobielbankierenapp is van groot belang om consumenten aan de bank te binden. Particulieren doen steeds meer bankzaken via de mobiele telefoon, maar ook het klant worden van een bank verloopt steeds vaker via de app. Een eenvoudig, snel en veilig onboardingsproces moet zorgen voor een eerste prettige klantervaring.

Enigma Consulting heeft onderzoek gedaan naar het onboardingsproces bij elf banken die actief zijn in Nederland . Op voorhand waren we met name benieuwd of gebruiksvriendelijkheid ten koste gaat van fraudepreventie en veiligheid.

In het onderzoek is het proces beoordeeld op drie onderdelen:

1. Gebruiksvriendelijkheid
2. Fraudepreventie/veiligheid
3. Innovatie

Op basis van de scores van de 58 criteria leidt dit tot het volgende inzicht, dat we graag in dit artikel nader toelichten.

De volgende banken zijn meegenomen: ABN Amro, ASN, Bunq, ING, Knab, Moneyou, N26, Rabobank, Revolut, SNS en Triodos. Regiobank en Van Lanschot bieden geen digitale onboarding en zijn daarom niet meegenomen in dit onderzoek.

Gebruiksvriendelijkheid: binnen een uur een actieve rekening
De challengerbanken scoren zonder uitzondering hoog op het onderdeel gebruiksvriendelijkheid. Bunq, Moneyou, N26 en Revolut springen eruit doordat de klant alle handelingen tijdens de onboarding via de app kan afhandelen. Er is geen afhankelijkheid van een ander device (zoals een identifier). Daarnaast zijn de processen nagenoeg papierloos, het identiteitsbewijs wordt bijvoorbeeld via de app gescand.

De challengerbanken scoren zonder uitzondering hoog op het onderdeel gebruiksvriendelijkheid. Bunq, Moneyou, N26 en Revolut springen eruit doordat de klant alle handelingen tijdens de onboarding via de app kan afhandelen. Er is geen afhankelijkheid van een ander device (zoals een identifier). Daarnaast zijn de processen nagenoeg papierloos, het identiteitsbewijs wordt bijvoorbeeld via de app gescand.

ING scoort goed op Android    
Van de traditionele banken scoort ING goed. Het proces via een smartphone met een Android-besturingssysteem verloopt soepel. Daarbij dient aangetekend te worden dat onboarding via besturingssysteem iOS (Apple) nog niet goed mogelijk is.

Snelheid en gemak zijn de sleutel    
Bunq, ING en Moneyou zijn de banken waarbij de onboarding in ons onderzoek het snelst verloopt. Binnen een uur heeft de klant een IBAN, toegang tot de bankomgeving en kan de klant geld overmaken naar een andere rekening. Het is bij deze banken niet nodig om een identifier/scanner of de bankpas te gebruiken voor het activeren van de rekening.

Triodos laat een matige indruk achter op het gebied van gebruiksvriendelijkheid. De bank vraagt als enige om een kopie van het identiteitsbewijs ondertekend per post retour te sturen. Triodos stuurt veel brieven (niet duurzaam), onder andere voor de identifier, voor de activatiecode en voor de pincode, waardoor het proces een lange doorlooptijd kent. In ons onderzoek duurde het dertien dagen voordat wij konden betalen vanaf de betaalrekening.

Ontvangen van pincode    
Een opvallend verschil is de wijze van ontvangen van de pincode. De traditionele banken sturen de pincode per brief naar het adres van de klant. Moneyou is de enige bank waarbij de klant de pincode krijgt toegewezen en kan aflezen in de app. Bunq, Knab, N26 en Revolut bieden de klant de mogelijkheid om de pincode zelf te kiezen. Dat laatste beoordelen wij als het meest gebruiksvriendelijk.

Fraudepreventie en veiligheid: stabiliteit bij alle banken
Alle banken laten een stabiele basis zien op het gebied van fraudepreventie en veiligheid. De banken scoren allemaal een voldoende wat betreft klantidentificatie en -authenticatie. De banken gebruiken verschillende methodes om een nieuwe klant te identificeren. Voor het delen van de identiteitsgegevens kan een klant bij de meeste banken in de app een foto of een scan maken van het paspoort, identiteitsbewijs of rijbewijs. ING leest daarnaast de chip op het identiteitsbewijs uit.

Heeft ASN geleerd van Rambam?    
Bij ASN kan de klant een kopie van het identiteitsbewijs uploaden in het webportaal. Daarnaast biedt ASN ook de optie om langs een balie van PostNL te gaan voor de klantverificatie. In een uitzending van Rambam werd op deze wijze met een gefotoshopte kopie van een paspoort identiteitsfraude gepleegd en een rekening geopend. Dat ASN deze mogelijkheid nog steeds aanbiedt, heeft een negatieve invloed gehad op de score.

iDIN speelt nog geen rol    
Opvallend genoeg gebruikt nog geen van de banken iDIN als identificatiemethode. iDIN is een dienst van de banken waarmee consumenten zich bij andere organisaties met de veilige en vertrouwde inlogmiddelen van hun eigen bank kunnen identificeren.

Identificatiestorting als extra stap maakt onboarding veiliger    
Als aanvullende identificatiestap vraagt een aantal banken tevens om een identificatiestorting, waarbij de klant een bedrag overboekt naar het nieuwe rekeningnummer. Vanuit veiligheidsoogpunt zien we dit als meerwaarde. Bij ASN, Bunq, Knab, Moneyou en Rabobank voltooit de klant deze stap via iDEAL waardoor deze eenvoudig uit te voeren is. Bij Triodos en SNS zet de klant deze stap door zelf een overboeking te doen en bij Revolut via een creditcardbetaling, wat voor Nederland minder gebruikelijk is.

Om er zeker van te zijn dat de aanvrager ook de dezelfde is als de persoon op het ID vragen enkele banken tevens om een selfie (ABN Amro, ING, Moneyou en Revolut), of meer specifiek een selfie waarbij de klant het paspoort in de hand houdt (N26) of een selfiefilm met ‘liveliness’ check. Daarmee wordt identiteitsfraude lastig gemaakt. N26 vraagt als enige bank om het delen van  locatiegegevens op de telefoon aan te zetten. Zodoende voegen zij een extra laag van veiligheid toe, doordat het mogelijk is de locatie te vergelijken met het opgegeven adres.

Procesbegeleiding in goede handen bij ABN Amro    
In de context van veiligheid hebben we ook gekeken naar controlemomenten voor de gebruiker gedurende het proces. ABN Amro scoort hierbij het beste. De bank begeleidt de klant via meerdere kanalen tijdens de onboarding. Daarnaast toont de app samenvattende schermen, waarin de consument continu de invoer kan controleren/valideren.

Gebruik van identifier   
Een kenmerkend verschil tussen banken is het wel of niet toesturen van een identifier of scanner naar het fysieke adres van de klant. ABN Amro, ASN, Knab, Rabobank, SNS en Triodos hebben de keuze gemaakt om een identifier te sturen naar de consument. De consument gebruikt de identifier tijdens de onboarding voor de registratie in de app en het activeren van de betaalpas. Impliciet wordt hierdoor het fysieke adres van de klant bevestigd en dat hebben we beoordeeld als extra veilig.

Innovatie:  via innovatie de mogelijkheid onderscheidend te zijn
Innovatieve oplossingen ondersteunen een leukere, veiligere en snellere onboarding. Dit komt terug in nieuwe toepassingen en onderscheidende features. We komen verschillende innovaties tegen.

• Bunq gebruikt als extra identificatiemethode een stemopname. Hiermee kan de klant niet inloggen. Mogelijk sorteert Bunq voor op voice payments? Interessant om te blijven volgen!
• Revolut biedt zowel een fysieke als een virtuele pas  aan, waarbij de fysieke pas wordt geleverd in een zeer leuk ontworpen mapje.
• N26 biedt passen aan met verschillende designs, mogelijkheden en prijsstellingen (N26 ‘Metal’)
• Bij Moneyou is de pincode van de bankpas op te zoeken in de app die deze getal voor getal presenteert.

Ook bij ABN Amro en ING zijn mooie innovaties terug te zien. ABN Amro biedt de koppeling van Bunq-rekeningen aan tijdens de onboarding en sorteert hiermee voor op PSD2. ING haalt de identiteitsgegevens automatisch op door het scannen van de NFC-chip in het paspoort met de mobiele telefoon. De duurzame banken ASN en Triodos laten nog weinig innovatieve oplossingen zien.

Conclusie: Gebruiksvriendelijkheid en snelheid gaan niet ten koste van veiligheid
1. Challengerbanken Bunq, Moneyou, N26 en Revolut weten met een volledig digitaal en papierloos proces, een korte doorlooptijd, strakke lay-out, innovatieve vindingen en degelijke veiligheid de traditionele banken achter zich te houden.
2. Een aantal traditionele banken kijkt tegen een flinke achterstand aan. Een verbeterslag is nodig om het gat te dichten en ervoor te zorgen dat de onboarding geen reden is voor consumenten om af te haken.
3. ASN en Triodos moeten oppassen dat het verschil met de overige banken niet te groot wordt. Door veel extra stappen en een langere doorlooptijd bestaat het risico dat zij de klant kwijt raken tijdens het onboardingsproces.
4. ING laat zien dat het mogelijk is om in korte tijd stappen te maken om dichter in de buurt te komen van de challengerbanken.

Het onderzoek heeft uitgewezen dat het mogelijk is om via innovatie een gebruiksvriendelijk en snel onboardingsproces in te richten zonder dat het ten koste gaat van fraudepreventie en veiligheid.

Auteurs: 
Roderick Kroon, Enigma Consulting, Partner
Martijn Kieft, Enigma Consulting, Consultant

 

 

ENIGMA Consulting

 

 

Registratieplicht voor cryptodienstverleners bij DNB

| 26-07-2019 | ENIGMA Consulting |

Aanbieders van diensten voor het wisselen tussen cryptovaluta en fiatgeld, alsmede aanbieders van bewaarportemonnees (crypto wallets), worden vanaf 2020 verplicht zich te laten registreren bij De Nederlandsche Bank (DNB). Zonder registratie mogen deze partijen hun diensten vanaf dan niet langer in of vanuit Nederland aanbieden. De registratieplicht vloeit voort uit de laatste versie van de implementatiewet tot wijziging van de vierde anti-witwasrichtlijn, ook wel bekend als AMLD5. De veranderingen uit dit wetsvoorstel worden voor Nederland doorgevoerd in de Wet ter voorkoming van witwassen en financieren van terrorisme (Wwft).

Via het wetsvoorstel worden cryptodienstverleners verplicht tot het doen van cliëntenonderzoek en het melden van verdachte transacties bij de FIU (Financial Intelligence Unit). Het is voor het eerst dat dergelijke dienstverleners binnen het juridisch kader van de antiwitwas- en terrorismebestrijding vallen.

Uit een vorige versie van het wetsvoorstel bleek dat minister van Financiën Hoekstra cryptodienstverleners eerst wilde verplichten een vergunning bij DNB aan te vragen. Naar aanleiding van een advies van de Raad van State van afgelopen juni is hiervan afgezien.

De Raad van State achtte een vergunningplicht een te ingrijpende en disproportionele maatregel: een vergunningaanvraag en het bijbehorende lopend toezicht zouden voor de cryptodienstverleners onevenredig veel lasten met zich meebrengen. De minister heeft dit advies overgenomen en de geplande vergunningplicht omgezet in een registratieplicht.

De Raad van State sluit in het advies een vergunningstelsel in de toekomst overigens niet uit. De vele onzekerheden rondom de ontwikkeling van cryptovaluta geven hiertoe op korte termijn echter geen aanleiding.

Om in aanmerking te komen voor een registratie dienen cryptodienstverleners bepaalde gegevens aan te leveren bij DNB, zoals het gevoerde beleid met betrekking tot klantacceptatie, transactiemonitoring en het melden van ongebruikelijke transacties. Ook toetst DNB de geschiktheid en betrouwbaarheid van de beleidsbepalers van de cryptodienstverlener. Een registratie kan op een later moment door DNB worden geschrapt indien bijvoorbeeld blijkt dat de geregistreerde partij structureel tekortschiet bij het voldoen aan de vereisten uit de Wwft of de Sanctiewet 1977.

De aanwijzingen uit de vijfde antiwitwasrichtlijn moeten op 10 januari 2020 zijn doorgevoerd in de relevante wetgeving van alle EU-lidstaten. In Nederland is het implementatiewetsvoorstel is op 1 juli ingediend bij de Tweede Kamer en eind augustus wordt de schriftelijke voorbereiding voortgezet. Indien het wetsvoorstel tijdig wordt geïmplementeerd hebben cryptodienstverleners vervolgens tot 10 juli 2020 de tijd om de registratieprocedure bij DNB af te ronden.

Wilt u weten of de cryptodienst die u aanbiedt onder deze nieuwe verplichtingen valt, of heeft u als cryptodienstverlener andere vragen over de gevolgen van de nieuwe richtlijn voor uw onderneming? Neem dan gerust contact op met Enigma Consulting.

 

 

 

Big tech vs Fintech vs Banks – in international payments

| 09-07-2019 | by Patrick Kunz |

This title makes it sounds like it’s a fight. To be honest: it is! The market for international payments is huge and its lucrative. In a McKinsey report the 2018 market size for payment revenues was close to 2 Billion. Not strange everybody wants a slice of that.

Fintech & Banks

Traditionally the market for international payments was dominated by banks. Recent years and technological advancements has shown that banks are slow to adapt to new technology and market requirements. In some cases it still takes days to transfer money from Europe to Asia, while an email, FB message or picture can be send in seconds. Fintech has tried to fill the gap with innovative tech solutions that solve these problems. Often these companies are lean and mean and adapt to market changes much quicker than the big stable banks. They provide cloud solutions, link to every bank possible and make you more bank independent. Lately we have seen consolidation in the fintech market where players are merging, growing or being taken over by banks. Some banks have started their own fintech. But often fintech only solved a part of the problem and is build on the existing (bank) infrastructure. Banks are also working on innovation: instant payments, swift GPI and PSD2 api’s are helping the customer paying faster and easier. These initiatives are great but have taken years to be implemented.

Bigtech

Then there is a third group of players: big tech. These are the google, facebook and alixpress of our world. These are traditionally IT companies who have a big client base but these companies where not involved in payments (yet). Their edge is size, market access and fast adoption. What happens if they enter the market for payments? Are they likely to win? Look at Alipay, massively successful in China but growing immensely outside Asia to. Why ? because it is easy to use, innovative, low cost and probably most importantly connected with an existing service of the bigtech (alixpress – shopping). The company provides the full customer journey: shopping for product and paying the goods in the most easy way without moving away from the website. Not only via desktop but also via mobile. On the go they make it possible to pay by scanning a QR code, in a grocery store or in a cab. Who needs cash OR a debit card, you only need your mobile phone and an app! Why was this successful? Because the existing customer base was already there they just vertically integrated into the customer journey; easier for the customer and therefore extra revenue for Ali. But also more power for Ali.

Stablecoin Libra

Looking at Facebook and their Stablecoin Libra. Digital currency, unregulated, not based on the traditional banking/payment infrastructure. There are big and significant differences with Bitcoin but the idea is the same: sending and receiving money worldwide in an instant as digital currency. There should be no speculation on the Libra-Rate as the rate of exchange is based on a basket of currencies (EUR, USD, JPY etc). Similar to the old tech Special Drawing Rights from the IMF. So what makes libra different to bitcoin and the other coins? I am not going into the technical differences as that is beyond my scope and would bore you. The main difference is the easy of adoption. New to bitcoin and want to use it: you have to open a wallet, trading account and learn have to transfer the BTC to somebody and the receivers also needs a wallet; a barrier for most. Using Libra will be much easier as it is just an extension of the services of Facebook. Libra potentially has 2,4 billion users (the number of facebook accounts). This is a big competitive advantage. Compared with smart marketing (facebook knows that) and combining it with existing products there is a big potential. Sending money to your facebook friends in Australia or Japan? No problem: in-an-instant via Libra. Besides facebook it is also supported by other big players like Visa, Spotify, Paypall, Mastercard, Vodafone. Is there a future without Libra ? And how many facebook users are there without an bank account. There are 2,4 billion facebook users and 1,7 billion people without a bank account in this world. The reach is already huge so there is low barrier for adoption.

The Battle

Does this mean bigtech will be ‘winning’? In my opinion hard to say. That battle is being fought the coming years. Don’t forgot the power and influence of regulator and governments. Digital payments are unregulated and unknown and could influence the power of governments and the whole banking infrastructure of money regulation, central bank money creation and some even fear de-stabilization of the monetary system as a whole. Regulators could stop/limit the quick steps forward by bigtech.

The coming years will be exiting to see the technological advancements in the battle for payment revenue. The winner will be the consumer; easy of paying will increase further and more importantly the speed will increase. Paying how we want and within a blink of an eye, and this worldwide, will be the new standard within several years.

 

Patrick Kunz

Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV

 

Facebook and Libra: the new global currency?

| 04-07-2019 | Carlo de Meijer | treasuryXL

Since Facebook announced to launch a new digital currency, the Libra, a complete media craze arose. The one blogger stumbled as it were over the other. And while the one group sings hosanna over this initiative (a salvation for the bankless), warning signals come especially from the supervisors and regulators part (time bomb under the global money system). And next to that there arose a great many discussions on whether or not the crypto character of the Libra. What are the chances that this Libra will really see the light? And if so, what will that mean for the existing financial system? Let’s give it a shot.

What is the Libra?

Libra is the new declared crypto currency (based on blockchain technology) of social technology giant Facebook. Libra is meant to become the in-house currency for Facebook, Instagram and WhatsApp’s combined 2,7 billion users. An alternative digital means of payment to purchase products, sent money across borders or make donations. To enable peer-to-peer payments, a digital wallet, the Calibra will be introduced that will work with Messenger and WhatsApp.

The mission of the Libra project is to come to a simple world currency and a financial infrastructure that may help move forward the millions of unbanked people in the emerging markets. Money transfers by labour emigrants, so-called remittances, are one of the most important income sources for those people. Annually, according to the World bank, almost 500 billion of euros are being transferred via private bookings from rich to poorer countries. And that at very high fees.

The Libra Association

Libra will be controlled by an independent body, the Libra Association, that will be based in Switzerland. The Association nowadays consists of 29 founding members (including Facebook), with big names like MasterCard, PayPal, Visa, Booking Holdings, eBay, FarFetch, Lyft, Spotify and Uber. The intention is to have 100 founding members by the time it launches next year.

The Libra Association will actively manage the Libra currency for stability. Each Libra will be covered by liquid means for the full hundred percent. For every Libra that will be issued, the Libra Association will have to maintain a basket of short term government bonds and (real) fiat currency including dollars, euro and yen. If these Libras are exchanged into fiat currency, then also the coverage disappears.

Reactions

The launch of the Libra, though just in 2020, has triggered a deluge of reactions from governments, supervisory, regulatory authorities and others like the cryupto world, media etc. all over the world. Some are positively optimistic, others reacted cautious but most are sceptic or even negative. Terms like corporatocracy and techno-pocalyps were even mentioned to describe this Libra project. And that is not surprising!

Most intensive reactions came from France where the Finance Minister le Maire said that “Libra cannot  … and must not happen” and that “it was out of the question that the cryptocurrency should become a sovereign currency”. He has asked central bank heads from G7 countries to write a report on the Libra by mid-July.

The BIS already has put a lot of attention on alternative currencies in its recently published annual report. The BIS warned that if big social technology companies like Facebook or Amazon, are going to dominate the financial system, that will increase the risk of system disturbances.

Other international organisations like The International Stability Board are  very sceptical about the Libra plan, while the British supervisor FCA is not yet prepared to accept the Libra.

But most important, we are still awaiting the official reaction of US supervisors. The ambitions are, especial from the US, to halt the Libra development until further investigation offers the well needed answers. For that purpose the Senate Banking Committee has scheduled a hearing for July 16th, while Facebook has been invited to testify at a hearing of the Financial Services Panel on July 17th.

In the UK it could have similar scrutiny, as the Bank of England noted that
“regulators would have to consider how they’d treat this new asset class”. Though they are not that negative, the Bank of England governor Carney stated that Libra would be subject to the highest standards of regulation.

Libra is …..

…. not a cryptocurrency!

From various reactions on the Libra project it was made clear that the Libra is not a cryptocurrency, as was declared by Facebook. While cryptocurrencies are decentral, transparent and anonymous, the Libra has nothing of these characteristics.

It follows the business model of Facebook, being centralised, closed for the external world and almost without privacy for its users. Though the Libra Association in which Facebook just has a very small vote, and it is supposed to have 100 partners in total, the technology and infrastructure is in hands of Facebook.

….  not a (real) blockchain

Looking at Facebook’s Libra, it makes no real use of blockchain technology. The Libra blockchain is a very special one. There is one big block in which all transactions are being stored, very similar to a normal database. Nobody is aware, but the data at Facebook will not be transparent.

…. (more like) a private digital currency

Contrary to the well-known cryptocurrencies like Bitcoin, Ethereum and Ripple, the Libra is covered by financial assets including government debt and fiat currencies. In that sense the Libra is rather similar to private issued  banknotes.

No level playing field for banks

Some see Facebook Libra just like an ordinary bank. With the introduction of the Libra, Facebook will execute the old-fashioned banking matters, in that way that via the Libra app, Calibra one can transfer money globally and instantly. So, the Libra in fact combines digital ease with the structure of a bank.

And who knows if Facebook is going to offer more than just payment services. It is very likely that they will (in the near future) broaden their services by offering credits etc. And if that is the case, Facebook is starting with their creation of money. Imagine a bank with the potential of 2.4 billion of clients that is not subject to regulation and supervision, creating a non-level playing field.

Urgent need for proper supervision and regulation

There are a range of risks when this process takes place without guidance by supervisors and regulators. A new digital currency with the potential capability of the Libra (Facebook has no less than 2.4 billion users), should be  matter of both banking supervisory bodies and monetary authorities.

Think about the following: the Libra has been launched and Libra will have to keep an equal amount of hard currencies in reserve as the brought in money, that should be invested in short term, government bonds in the various currencies incl. dollars, euros and yen. If the components of the basket changes, or the number of Libra brought in by Facebook fluctuates strongly, that might have impact on the financial system.

If the Libra becomes a success it will be crucial for the functioning of the payments system that it should be subject to the highest standards of supervision. Supervisors should therefore soon come with the decision what the Libra now exactly is: a currency, an investment or something complete different.

Should central banks step in?

Another issue is: how should Central Banks react. Introducing the Libra will also cause sensibilities in the monetary field. Question that arise: will the Libra become a – although stable – currency that will be created separately from the existing system or will it be a complement?

With the introduction of the Libra, Facebook is in fact filling the gap left by the central banks on the international payments market. Key question is: what is preferable, a private global digital currency or a public variant issued by central banks.

According to editors of the Financial Times, the “Zuck-Buck” as they call the Libra will be no less than a global shadow currency, a private variant of a global system of central banks, a sort of Federal Reserve.

It is thus high time that the long-lasting debate about a digital currency issued by central banks should gather space with the possible arrival of the Libra. Just staying on the sidelines is no issue any more. The technology is there.

Why not the IMF thinking about creating an international digital currency that brings stability and meet all the privacy challenges.

Hurdles for Facebook to overcome

The Libra is not there yet. Facebook still faces many hurdles and needs to answer many questions.

I admit, there are positive sides to the Libra initiative, such as Libra’s promise to have cheaper – or even no – transfer costs, while Libra payments will be made as easy as WhatsApp. And there are the potential efficiency gains and better entrance to financial products by many unbanked which may lead to economic growth. But there are also many negative issues to be mentioned.

When talking about privacy, Facebook has not a good reputation. How will Facebook handle the privacy rules? And how is Facebook going to convince customers to give their money in play? But also, how can Facebook prevent that the Libra will also facilitate transactions that possibly may be used for criminal purposes. Therefor Facebook should show that for them it is serious in properly meeting the privacy rules.

“This money will allow this company (Facebook) to assemble even more data, which only increases our determination to regulate the internet giants”. French Finance Minister Bruno Le Maire

Another potential legal hurdle for the Libra project is to keep banking and commerce apart. To prevent conflicts of interest payments and banking are separated from the rest of the economy in the US. Depending on what data is visible for the partners in the Libra Association, there may be enough legal issues that should be solved.

And there is the size issue. According to many, Facebook is already too big and too powerful not to be supervised and regulated. In order to get an “ethical banking culture”, it is needed to make sure that institutions, crypto or not, will not be ‘Too big, to Fail’.

Facebook may also count on the appropriate competition. Such as from China by players like Alipay and We Chat. Moreover there is a big chance that also other tech companies will come with their own currency.

By the way, I am also on Facebook and have a lot of friends. Keep it like that!

 

 

Carlo de Meijer

Economist and researcher

 

Blockchain: Game-changer for Small & Medium Enterprises?

| 21-06-2019 | Carlo de Meijer | treasuryXL

In many countries Small and Medium-sized Enterprises (SMEs) are the backbones of their economy. Their role is crucial to worldwide economic and social developments, with more than half of the overall world population working in such companies. In the Netherlands for instance, more than 90% of the Dutch companies are SMEs and together they produce 60% of the added value of the Dutch Economy. SMEs however are confronted with a number of important challenges. including limited access to bank loans, inefficient procedures and lack of information necessary to conduct business efficiently.

While most people relate blockchain to large companies, blockchain also opens new opportunities to SMEs in every sector to solve existing challenges and enable them to optimise their business and develop new business models. Up till recently there were several obstacles which led to slower adoption of blockchain and other distributed ledger technologies by SMEs. But that is changing.

Let’s have a look!

SMEs and present challenges

Despite their status as the backbone of any major economy, SMEs face many challenges. They have a great problem in finding  financing, scale their operations, process payments and recruit other ancillary services that are both necessary to grow or go global. For emerging economies, increasing access to credit is key to generate of new jobs and economic growth.

  • Bank loans

 A big problem for SMEs, esp. for beginning entrepreneurs is to get a loan from banks for starting or growing their business. This is why many of the new or ongoing small and medium-sized businesses disappear. Almost 30% of SME companies shut down in the first three years of operation due to lack of funding.

Since the banking (credit) crisis of 2008, banks are inherently risk averse, so their tolerance for SME lending has become relatively low. Last year’s report from the World Bank estimated that 70 percent of small, medium, and micro-enterprises are unable to access the credit they need. While the global demand for SME credit stand at $2,38 trillion, the truth is, only a fraction (about 15%) of businesses actually get the loan that they request from banks.

  • Trade finance

 Another challenge for internationally operating SMEs is to get trade finance. Trade financing, much like many forms of credit providing, is a key component of the success of SMEs, but that key is not always easy to obtain. SMEs face lots of hurdles in their quest for funding, especially when it comes to accessing traditional trade finance products. Trade has changed dramatically in the last 10 years. But trade finance has not. The $1.5 trillion trade finance gap is driven by data shortfalls. The industry is still heavily paper-based and follows outdated processes and procedures. Typical trade finance operations are as a result still time-consuming, bureaucratic, and simply too expensive for new SMEs. This disproportionately impacts small- and medium-sized firms and firms in Asia and the Pacific.

  • Cash flow issues

 Inability to bring in capital continues to cause enormous harm to small businesses–stifling growth and causing cash flow difficulties. In fact, 40 percent of small businesses reported cash flow issues within the past year. Businesses need cash flow to pay for materials, start the production process, pay employees, or cover any other business expenses. For smaller companies a late payment can be the difference between success and failure.

  • Limited alternative financing

 These SME companies nowadays often turn to alternative forms of financing to obtain funds and ease their cash flow issues. In recent years, the peer-to-peer (P2P) lending system emerged as an alternative to the bank loans. And this segment is growing. Crowdfunding has also emerged to fill the gap in the market, but is mainly focused on technology start-ups. This new funding route is closed to most SMEs from other sectors.

  • Personal identity

Personal identity and data control are major concerns for online retailers as most of the interactions between customers, and online retailers are controlled via usernames and passwords stored in centralized platforms. Such platforms are vulnerable to hacking, and user data can be accessed and misused by hackers. Next to that people can easily falsify documentation and identity proofs.

  • Adoption of new technologies

 Another major challenge for many SMEs is how to deal with new trends in digitalization and automation. While large corporates often have the resources to react promptly, experiment and develop new products and services and thus benefit from the new technologies like blockchain, this is not the case for many SMEs.

This while they are experiencing problems for which these solutions including blockchain could be a solution. Many small- to medium-sized companies find it difficult to get started with new technologies since the scale of SMEs is often too small, among other reasons. Most SME’s miss the manpower, skills and knowledge to develop new strategies on such new trends.

 

Use cases

Blockchain presents itself as a solution to these challenges. This technology could solve the problems in the areas of funding and trade finance. Though it makes sense to use blockchain for money-related businesses, they may also be used to solve many of their inefficiency problems. Safe and secure data transactions and smart contracts may optimise supply chains and improve client satisfaction by automated services.

  • Trade finance           

Blockchain could became a game-changer for SMEs that are looking to expand abroad in their search for trade finance. Trade finance products are being made more efficient due to transparency and the consensus mechanisms that replace multiple instances of verification and checking.

A new study by the World Economic Forum and Bain & Company shows that blockchain technology could play a major role in reducing the worldwide trade finance gap, enabling trade that otherwise could not take place. Another finding is that the impacts would be largest in the emerging markets and for SMEs which may display the use of the technology beyond well-established markets and corporations.

The Asian Development Bank forecasts the global trade finance gap currently stands  at $1.5 trillion, or 10% of merchandise trade volume and is set to grow to $2.4 trillion by 2025. But the results from the new study shows the gap could be reduced by $1 trillion using blockchain technology efficiently.

  • Supply chain finance

Blockchain technology may also contribute to solve the problem of getting supply chain finance. A bigger segment of the market is nowadays building open account solutions. But because of the difficulty in tracking how deep the supply chain is, often financing is only offered a few tiers deep. As blockchain is much more flexible with data than existing digital systems, this technology opens up the possibility of this level of financing.

On blockchain, both suppliers and buyers have access to necessary transactional information in real-time. Every step of the supply chain process is time-stamped and verified by all parties, meaning that information is accurate and immutable. This added level of visibility may also mean that businesses will have more invoice financing solutions available, too. This transparency may result in faster transaction processing improved cash flows for suppliers, and potentially better rates from invoice finance providers.

  • Smart contracts

One of the most attractive features that blockchain has is the potential to offer SMEs smart contracts, which not only define the terms and penalties around an agreement in the same way that traditional contracts do but also automatically execute and enforce those pre-agreed terms and conditions (but without the need for middlemen). Many labour intensive and expensive business processes can easily being replaced at little cost.

The largest opportunities could come from smart contracts, single digital records for customs clearance. Smart contracts can represent an invoice, or any similar financial document, and be used as collateral to support a loan. They would help mitigate credit risk, lower fees and remove barriers to trade.

To avoid the initial development costs of building on Ethereum, there are already blockchain companies like Confideal and dApp Builder that make it easy to create and launch a complete smart contract portal with just a few clicks.

  • Funding/collateral

Blockchain technology has the potential to completely “reinvent the wheel” when it comes to SME funding. Blockchain could help revive peer-to-peer lending practices that has emerged outside of the regular banking system, by digitizing what was once a manual process.

Through disintermediation, blockchain makes it significantly easier and faster for small and medium-sized companies – not just technology start-ups – to raise funds through equity. The removal of these barriers reduces the need for complicated paperwork, while the automated nature of the process may mean that  commissions, excessive brokerage fees associated with selling shares, and other overheads can all be left behind.

  • Identity management 

Another area where blockchain could become a game changing factor is in the area of online identity verification. A growing number of SMEs do their business online triggering demand for increased online security. The risk of identity theft and fraud could be eliminated with the use of a decentralized identity, such as blockchain. It allows a more effective and reliable form of identification of a person without the requirement for third party involvement. As well as the benefits in terms of the reliability of the verification, the speed at which checks can be performed is much faster. This can help businesses speed up processes and make them more reliable.

 

SME-focused initiatives/projects

To address the various challenges for SMEs in their search for blockchain solutions, a growing number of SME-focused initiatives have been launched.

  • Blockchers project

One of these programs is Blockchers, as part of the European Horizon 2020 project. Blockchers is a project that will facilitate the revolution of blockchain and other distributed ledger technologies (DLTs) across European SMEs. It is an acceleration process for SMEs and start-ups to build real world use cases of blockchain technologies, thereby financing real world use cases of this technology in traditional sectors.

One of the main goals of Blockchers will be fostering the matchmaking among traditional SMEs and potential DLT specialists, as technology providers, and “sensitize about the benefits and opportunities around DLTs to implement real use case scenarios in a variety of verticals”.

Alastria Blockchain Ecosystem has been chosen by the European Commission as the technological partner for the Blockchers Project. They will  provide the blockchain infrastructure to the start-ups participating in this EU Project, developing blockchain solutions to SMEs.

  • Project Blockstart

To make sure SMEs can experiment “if and which blockchain solution will help to tackle the problems in their activities”, Bax & Company, a leading European innovation consultancy, has set up the project Blockstart. The aim of Blockstart is to increase the competitiveness of SMEs in the health, agro-food and logistics sectors by providing business support, identifying and testing business opportunities from blockchain innovations. Working together, the partners that will form an international ecosystem of business networks, incubators and blockchain experts, will test the market readiness of different blockchain solutions in real-life settings. Blockstart will help small- to medium-sized enterprises (SMEs) strengthen their competitive positions through the use of blockchain technology.

  • Dutch logistic project

And there is the project of RDM Knowledge Center and Sustainable PortCities in cooperation with Windesheim University of Applied Sciences, to investigate the opportunities for SMEs in the Dutch logistics sector to benefit from logistics applications of blockchain. In the project SMEs active in cold chains, the pharmaceutical industry, transport, forwarding and warehousing are involved.

They try to give answer on questions that SMEs ask, including: what are the consequences of blockchain for their business model?; what kind of knowledge should they have about the potential of blockchain?; could blockchain technology improve their logistic processes?; and, how can blockchain technology create added value for their company?

  • Singapore PLMP Project

Singapore blockchain company PLMP Fintech has launched the Blockchain Technology Creatanium Centre (BTCC). BTCC is a blockchain centre, focused on accelerating the blockchain ecosystem for Singapore small and medium-sized enterprises (SMEs) across various industries, allowing businesses to compete on a global level and increase efficiencies in operations and funding. BTCC will also provide education and development as well as house a blockchain and ICO ecosystem.

Similar centres are planned for Indonesia and Thailand.

 

SME-focused blockchain platforms

Furthermore, to help increase blockchain’s adoption across multiple industries and enlighten businesses of the technology’s potential, a large number of open source collaborative blockchain platforms have been created such as Hyperledger, Ethereum etc. Their main goal is allow enterprises to build customised blockchains that would answer specific needs instead of letting companies solve issues on their own. In recent years also platforms specific focused on SMEs have been launched such as We.Trade, Karma and others.

  • We.Trade platform (trade finance) 

Nordea has launched a blockchain-based platform designed to make it easier for SMEs to trade with other companies in Europe. The we.trade platform, a blockchain network for trade finance, is available to all Nordea SME customers, with trading controlled through a set of rules designed to bring security to the process.

The new offering is built on the we.trade platform developed by a group of 12 banks using IBM blockchain technology. The aim of the project is to simplify trade finance processes for SMEs by addressing the challenge of managing, tracking and securing domestic and international trade transactions by connecting all of the parties involved (i.e. buyer, buyer’s bank, seller, seller’s bank and transporter), online and via mobile devices. Providing more companies more efficient access to trade financing and credit across Europe will allow them to grow their business by expanding into new markets and forging new trading partnerships.

  • Karma (funding)

Karma (Russia), launched early 2018, is a true P2P platform which is fully decentralized. By design, the platform is a unique enabler that gives SMEs access to additional liquidity. Based on the blockchain technology, it enables users to invest in any SME. The platform offers its users a wide spectrum of investment opportunities. One of the features that make Karma “stand out of the crowd” is its ability to let investors lend to SMEs anywhere around the world.

  • Traxia (trade finance)

Traxia is a decentralised global trade finance platform. The proposed new blockchain-based system used to assess the creditworthiness of SMEs, will build a bridge between the banks, the SMEs and the data provider.

By using the blockchain, and smart contracts they will be able to offer transparent, fast, and not so costly transactions for small businesses. Thereby solving the long waiting problem by allowing for a transparent platform for invoice trading designed just for SMEs.

The loan system will connect technology to how people think and behave to determine who is credit-worthy. The system will link alternative payment data to accounting certificates to mobile and social data to psychometrics. The alternative payment data thereby looks at utility payments, rental payments and accounting certificates.

  • Blockchain identity platforms

Already, a number of blockchain-based companies are taking advantage of blockchain’s identity tools. Its decentralized nature and security features to provide better and more transparent identification tools, offers a way for customers to identify themselves and have access to certified documents and notaries as well as a marketplace for customers to purchase services and products.

Instead of buying expensive, centralized server architecture or “paying hefty fees” to companies like Amazon Web Services or Google, a comprehensive start-up CEO might instead choose to rent custom-sized decentralized hosting space from a blockchain platform. This provides increased data integrity and a more efficient cost plan as well.

  • Other blockchain-based platforms for SMEs

A group of 11 Indian banks have teamed together to unveil the nation’s first blockchain-linked funding for SMEs. The goal is to revamp lending for “default-prone small firms”, by helping bring forth the virtue of transparency. The blockchain network will allow the banks to access public credit data so they can reduce risks when offering lending. In 2018, the Hong Kong Monetary Authority (HKMA) embarked on a similar undertaking and launched eTradeConnect. The blockchain-powered platform was aimed at solving the various challenges that hamper the link between banks and SMEs.

Later that year, the Abu Dhabi Global Market, another multinational financial hub located in the United Arab Emirates, entered into a joint agreement with HKMA and Singapore’s central bank. They aim to create a blockchain-powered, cross-border trade and finance platform for SMEs hassle-free access to funding.

 

What advantages may blockchain bring for SMEs?

Blockchain has the potential to offer a lot of distinct advantages to small and medium-sized businesses, such as trust, speed, more safety and security as well as risk reduction in terms of lesser identity fraud and hacking, thereby reducing time and unnecessary costs.

This may enable them to solve the cash flow problem, the paperwork issues, as well as the problem to go global (thanks to the globality of blockchain platforms), preventing them from going bankrupt.

  • Available funds

First of all the risk of getting no funds at all will be greatly reduced. Because there is no doubt about when funds will be released, companies can deliver services in time knowing that funds will always be available when they should be. Payments for goods from distant buyers and payroll to overseas employees may become easier and can be completed at a fraction of the current costs. As a result, it can help bring products and transactional services to market quickly and inexpensively.

  • More safe and secure transactions

Security and transparency will also prove to be value-added benefits of blockchain for businesses. For SMEs with global aspirations, blockchain technology using secure communication techniques may guarantee more safety and security in their transactions.

The blockchain technology will assist firms to overcome problems associated with asymmetric information, collateral requirements, a lack of sufficient credit reporting agencies and internet data security and cybercrime. Blockchain technology thereby ensures safe, automated and efficient data transactions that may be used in the exchange of private information, or monitoring goods in transport or tracing the origin of food products.

  • More cost efficient processes

To make their processes more efficient , blockchain applications will definitely streamline business processes and offer a great potential for reducing costs and complexity of processes.

Significantly reducing overhead costs is a major advantage for small businesses hosting services on the blockchain. Using blockchain means reducing the amount of resources and time entrepreneurs put in for administrative tasks. This may contribute to offload the traditionally high costs of security, Know Your Customer (KYC) protocols, data storage and other overheads.

Apart from significantly reducing the investment that founders must make in these support activities, the cost savings can be passed onto customers to make prices more competitive. This may allow SMEs worldwide to compete on a more level playing field.

 

What are SMEs already doing?

A study conducted by the Emory University (US Atlanta) in collaboration with Provide Technologies and Aprio claims that the small and medium enterprises are investing twenty-eight times more in blockchain than large enterprises. The report furthers that most of the blockchain-based projects are aimed towards business process automation while authentication and compliance are the second and the third most significant blockchain usage across the globe. The report also marks that the payments industry stands fifth when it comes to blockchain adoption whereas, identity management and market place governance follow the top tier applications very closely.

There is a growing community of innovative start-ups that are developing SMEs focused blockchain solutions. However, the sectors in which DLTs really make sense, besides fintech, could be those in which existing SMEs do not (yet) have enough knowledge on how DLTs work nor how they could uptake these technologies (traditional SMEs).

Need for regulatory framework

Blockchain SMEs face uncertain regulation that limits their scope of action and imply a risk for their growth. The real challenge, going forward, will be the legality of smart contracts, and a global regulatory framework needed to establish true peer-to-peer lending across borders; just because it is legal in one country, does not make it so in the next.

A “good” regulatory framework should bring more clarity, fostering the uptake and prevent from fraudulent actions such as those linked to the anonymity of users in transactions. In the meantime, the power and potential of blockchain and smart contracts is increasingly being recognized across the business and political spectrum. While it may take regulators some time to catch up, broader adoption will lead to sensible regulation.

Forward thinking

Looking at these advantages, it is easy to see why a growing number 0f entrepreneurs  in the SME world is willing to invest more into blockchain. With the blockchain and related services such as smart contracts, the SME world may expect to see a total transformation of how they nowadays do their business. Blockchain will make international dealings more conducive for SMEs and may allow them to compete in ways that are unthinkable today.

Blockchain is however still in its early stages. The mass adoption of blockchain by SME companies has not yet started, and widespread adoption will take time. For this to happen, the biggest obstacle is getting more businesses to build on blockchain and drive customers toward these solutions. This asks for trust.

Trust will be built over time, and in order for the promises to become a reality, some businesses must start trusting the process. Proving to the world that there is a lot of opportunity in using the blockchain for absolutely everything related to business.  Given how this technology could boost trade by more than $1tn in the next ten years, according to World Economic Forum, this may be a call-up to the big blockchain companies to come up with SME friendlier solutions.

 

 

Carlo de Meijer

Economist and researcher

 

 

Blockchain-as-a-Service: accelerator for adoption

| 04-06-2019 | Carlo de Meijer | treasuryXL

Blockchain technology has attracted growing interest from various businesses from large corporates to SMEs. But a large scale adoption by corporates and others has long time been hindered by the lack of options. But that is changing.

When interacting with the blockchain they have now two options. They can either set up their node directly, thereby removing the “invisibility cloak” of blockchain. Or they can decide to let someone else do that for them. And here comes BaaS or Blockchain-as-a-Service in scope. BaaS or Blockchain-as-a-Service is comparatively a new blockchain technology, that can be easily integrated in existing corporate infrastructures.

The global Blockchain-as-a-Service Market is set for a rapid growth. According to a recent survey, the Blockchain-as-a-Service is expected to register a CAGR (Compound Annual Growth Rate) of over 15%, during the forecast period (2019-2024), reaching around USD 30,6 billion globally by 2024.

We are not surprised by the emergence of Blockchain-as-a-Service. This overall Blockchain-as-a-Service market has seen accelerated growth with the coming up of creative innovations for blockchain and a faster growing customer demand. The growing demand for this new way of delivering blockchain services is attracting a wide field of new providers in the BaaS market, offering gigantic entryways for advancement.

Why BaaS?

Why do businesses need Blockchain-as-a-Service? Blockchain technology is on rise and business are increasingly willing to adapt to this technology. So far, however, the impact of blockchain disruption has been rather limited.

The companies that really want to use it, may encounter a number obstacles. The resources and expertise needed to develop new blockchain technologies has been a major hurdle for businesses that want to adopt the blockchain.

Blockchain technology is rather knew and relatively unknown. The technical complexities and operational overhead involved in creating, configuring, and operating the blockchain, and maintaining its infrastructure, often act as deterrents to its mass adoption.

Corporates are still far away from understanding the future of blockchain technology and the complexity of setting up of blockchain networks. Its implementation in terms of any technological change entails organizational risks.

Blockchain requires huge investment when it comes to setting up infrastructure and maintaining it. It is much more resource intensive, as compared to traditional databases.

 What is BaaS?

A Blockchain-as-a-Service platform is based on, and works similar to, the concept of Software as a Service (SaaS) model. It is a full-service cloud-based offering that enables customers including corporates to leverage cloud-based solutions to build and use their own blockchain applications and smart contracts and functions that will be hosted on the BaaS platform.

The BaaS platform would deal with the always confusing and labour-intensive back end activities for corporates and/or their business. They will provide all the necessary infrastructure and operational support to ensure that the blockchain applications run smoothly.

The platform will manage all the necessary tasks and activities to keep the infrastructure agile and operational. In other words, it allows the blockchain part of the technology to be relatively invisible for corporates.

Blockchain-as-a-Service providers are, therefore, key for large-scale blockchain adoption across businesses as they enable companies to adopt the blockchain without having to spend as much money as they would have to if they were to develop blockchain solutions on their own.

How does BaaS work?

BaaS would work similar to that of a web hosting provider. BaaS is like a blockchain module toolkit and utility system under the Blockchain Engine for which their users pay a fee.

In BaaS, an external service provider sets up all the necessary blockchain technology and infrastructure for a customer. By paying for a fixed BaaS subscription or consumption, a client pays the BaaS provider to set up and maintain blockchain connected nodes on their behalf. A BaaS provider thereby handles the complex back-end for the client and their business.

The BaaS operator also takes care of support activities like bandwidth management, suitable allocation of resources, hosting requirements, and provides security features like the prevention of hacking attempts.

Leveraging BaaS model, the client can now focus on their core job – the functionality of their blockchain – instead of worrying about infrastructure and performance related issues.

BaaS for who?

Blockchain-as-a-Service is ideal for organizations that wanted to outsource their technological aspects, and are not involved in understanding the working mechanism of the blockchain.

According to the earlier mentioned survey, the financial services industry is expected to occupy the largest market share. Blockchain-as-a-Service offerings are already revolutionizing this industry, as banks and financial service companies are among the most heavily invested enterprises exploring blockchain technology.

This is due to the many, highly valuable decentralized applications of blockchain technology, thereby giving rise to new business models in various areas, such as cross-border payments, remittance, exchanges, internet banking, trade finance, Know Your Customers (KYC), and risk and compliance.

The market is also gaining traction with SMEs that have not the sources to do that on their own. As these are increasingly working online, efficient blockchain services are increasingly required to secure the identity of digital entities and online authentication of personal identities, which drives the demand for Blockchain-as-a-Service offerings.

What may BaaS bring?

Allowing someone else to take care of the complex backend of blockchain ecosystem for corporates, allows corporates or their business to benefit from blockchain technology without really having to deal with blockchain technology.

Instead of creating and running their own blockchains, a business, large or small, can now simply “outsource” the technical complex work and focus on its core activities.

The BaaS format allows companies to familiarize themselves with blockchain technology before making conclusive business decisions about its use.

With BaaS as a cloud-based service, users will be able to develop their own blockchain based products like smart contracts, various applications and services without any setup requirement of the complete blockchain based infrastructure.

If BaaS speeds up, it can lead to real savings for companies. A study by Accenture found that blockchain technology could help banks reach cost savings to reach as high as 38 per cent, or around $12 billion.

 Top BaaS providers

The potential of Blockchain-as-a-Service has been recognized by some of the world’s largest software and technology companies. The interest of many businesses in implementing blockchain and the real difficulties of doing so have triggered several tech companies and cloud providers to now offer Blockchain-as-a-Service (Baas) to businesses that prefer to outsource the development of blockchain solutions.

The list of leading Blockchain-as-a-Service providers is growing, illustrating the growth in the dynamic on-demand tech sector. End 2015, Microsoft became one of the first companies to develop this service. The company has been adding BaaS modules to their cloud-computing platform, Azure, that is  focused on the Ethereum blockchain.

The Linux Foundation last year released Hyperledger Fabric 1.0, a collaboration tool for building blockchain distributed ledgers, such as smart contracts, for vertical industries. IBM has also built their own BaaS service, a Hyperledger Fabric BaaS system based on the Bluemix Cloud Platform. They are focused more on private consortium blockchains.

There are other big names as well that are betting on Blockchain-as-a-Service. Like Oracle Autonomous Blockchain Cloud Service, Amazon Web Services (AWS), HPE Mission Critical DLT and SAP Cloud Platform Blockchain. Of special note in this field is the work being done by R3. R3 has created Corda, a Distributed Ledger Technology (DLT) designed specifically to respond to the needs of financial institutions that use this technology.

Most recent BaaS platforms

Microsoft Azure Blockchain Service (ABS)
Microsoft this month announced the launch of Azure Blockchain Service, which is aimed to simplify the formation, management and governance of consortium blockchain networks. Azure, basically, offers Blockchain-as-a-Service (BaaS) by providing several easy-to-deploy, enterprise-ready templates for the most popular ledgers, including Ethereum, Quorum, Hyperledger Fabric, Corda and more.

Azure BaaS, in a nutshell, represents not just a public cloud hosting provider for distributed ledgers, but an organic and integrated low-cost, low-risk platform for building, delivering and deploying decentralized blockchain applications technology.

“Azure Blockchain Service deploys a fully-managed consortium network and offers built-in governance for common management tasks such as adding new members, setting permissions and authenticating user applications.” Microsoft

J.P. Morgan’s Ethereum platform, Quorum, will be the first ledger available in Azure Blockchain Service, giving both companies’ customers the ability to deploy and manage scalable blockchain networks in the cloud.

“Because it’s built on the popular Ethereum protocol, which has the world’s largest blockchain developer community, Quorum is a natural choice. It integrates with a rich set of open-source tools while also supporting confidential transactions, something our enterprise customers require.” J.P. Morgan

“Quorum customers like Starbucks, Louis Vuitton, and their own Xbox Finance team can now use Azure Blockchain Service to quickly expand their networks with lower costs, shifting their focus from infrastructure management to application development and business logic.” Mark Russinovich, chief technology officer at Microsoft Azure

Amazon Web Services (AWS)
Launching a managed blockchain service late last year, Amazon is now opening Amazon Web Services (AWS) for general availability. This new service is developed on top of open-source frameworks like Hyperledger Fabric and Ethereum.

Customers simply choose their preferred framework, add network members, and configure the member nodes that process transaction requests. Its Amazon Managed Blockchain takes care of the rest.

“Amazon Managed Blockchain takes care of provisioning nodes, setting up the network, managing certificates and security, and scaling the network. Customers can now get a functioning blockchain network set up quickly and easily, so they can focus on application development instead of keeping a blockchain network up and running.” Amazon

It is a fully managed service designed to help companies quickly set up blockchain networks of their own that can span multiple AWS accounts that are scalable and easy to create and manage and configure the software, security and network settings.

“This can be done with a few clicks in the AWS Management Console, doing away with the typical cost and difficulty of creating a company network”. Amazon

Already companies like AT&T Business, Nestlé and the Singaporean investment market the Singapore Exchange have signed on to use the company’s services.

Ardor (ARDR)
Ardor is one of the latest in the growing field of contenders for Blockchain-as-a-Service (BaaS) providers. It provides the blockchain infrastructure for businesses and institutions to leverage the strengths of blockchain technology without having to invest in developing custom blockchain solutions.

Ardor is a BaaS platform that will allow corporates and others to use the Nxt blockchain, an advanced blockchain platform. It separates security from functionality by creating multiple chains. Ardor offers a main chain that handles blockchain security and decentralization. It provides customizable child chains that come ready to use, out of the box, for various business applications.

When customers want to implement a new project on Ardor, they can create a child chain. The child chain holds all the functionality and customizability supported on the Nxt blockchain. However, it is still linked to the main chain and derives its security and decentralization from using the main chain for verification.

The developers of Ardor are the same company behind the open source Nxt project. Ardor however goes beyond Nxt to solve critical issues of blockchain growth, scalability, and customization. Ardor includes every feature supported by the Nxt blockchain, but it changes the architecture of how new blockchains get implemented.  

Towards decentralised BAAS solutions

BaaS however has some limitations though. An inherent tension seems to exist between the decentralized promise of blockchain and the more centralized nature of Amazon’s and other providers fully managed BaaS services.

BaaS should be seen as a means to an end, and necessarily involves adding some centralization to blockchain, which is never ideal. The purpose of blockchain is however to have decentralized solutions to centralized problems. This could be the banks as much as it could be any trusted middleman.

What does the ideal version of BaaS look like? BaaS is an essential step to be able to bring blockchain mainstream. But in a perfect blockchain world, we would not have centralized BaaS.

It could possibly look like Ardor and Nxt, where BaaS is front-loaded into the fundamentals of the blockchain. Alternatively, MIMIR Blockchain Solutions are creating the world’s first Decentralized Ethereum Service Provider (DESP). They are using Proof of Stake mechanics to allow for decentralized BaaS. Instead of having one entity set up all the blockchain infrastructure for a corporate, MIMIR creates a system where the multitude of nodes can work together to share blockchain access to the growing number of corporates and others  who want access to blockchain. Instead of relying on a centralized party to share blockchain access, MIMIR relies on a distributed model where all connected nodes can get paid to do the heavy lifting for people.     

Forward thinking

The arrival of Blockchain-as-a-Service or BaaS is an interesting development in the blockchain ecosystem that is indirectly aiding the blockchain adoption across businesses. Definitely, creating, maintaining and managing a new blockchain solution will be easier with BaaS.

Though BaaS does still require one to rely on a centralized third party, it is a strong step towards bringing blockchain technology to the world. BaaS may be the necessary catalyst that can lead to a much wider and deeper penetration of blockchain technology across various industry sectors and businesses.

BaaS will set the blockchain future trends by making it more feasible and solving the existing problems of the industry. As more businesses look for convenient and cost-effective ways to leverage blockchain technology, it is likely that BaaS offerings will continue to proliferate.

“Taking the burden of difficulty out of the equation” will allow a wide range of businesses and industries to adopt blockchain into their existing platforms.

Though there is still a long way to go, for many companies, BaaS is – at this moment – the best way to begin the blockchain journey. Keeping an eye on the space can help corporates to  choose the right BaaS provider for their business needs.

 

 

Carlo de Meijer

Economist and researcher

 

Blockchain and Stable Coins: opening the crypto markets?

| 20-05-2019 | Carlo de Meijer | treasuryXL

In my recent blog about IBM’s Blockchain World Wire I mentioned the use of Stable Coins as settlement instrument for global payment transactions. Not many are familiar with the term Stable Coins, because it is a relatively new type of cryptocurrency.

The Stable Coin market is however hotter than ever. In recent months, Stable Coins have seen remarkable growth in both size and variety. Today, with over 120 projects on the market, there is growing thinking that Stable Coins may trigger the mass adoption of cryptocurrency payments, thereby opening the crypto currency market. Facebook recently came with its WhatsApp Stable Coin. Even a traditional bank like JP Morgan has entered this market, with their own Stable Coin-like product named JPM Coin.

Why is there such a hype in talking about this phenomenon? And what are Stable Coins? How do they work and what should you know about it in terms of use cases, benefits and risks.

Why Stable Coins? 

But first of all: why Stable Coins? The cryptocurrency market such as for Bitcoin, Ether and others suffers from high volatility and unpredictable price fluctuations. They are struggling to maintain a decent valuation against the fiat. Last two years we have seen the market capitalization of the crypto reaching a high of almost 1 trillion USD before bouncing back to less than 200 billion USD. Most of the coins are down 80% from their all-time highs.

This volatile nature is one of greatest criticisms directed towards the crypto market. Because of this high volatility, Bitcoin and most cryptocurrencies are inconvenient for daily transactions. The demand for cryptocurrency is mainly fuelled by speculation and trading. Retail merchants on the other hand are sceptical of accepting the crypto as a medium for financial transactions. 

There is however a growing desire to bring stability to the cryptocurrency market. The  current market sentiment is turning more towards less price-volatile options. It is thus not surprising  that interest in Stable Coins is on the rise.

“Unlike cryptocurrencies such as Bitcoin, which are highly volatile, stable coins provide people with the pragmatic, helpful benefits of a cryptocurrency, without having to worry about distressing price changes since they are grounded in the real world.” Brigitte Luginbühl, CEO of SwissRealCoin

What are Stable Coins? 

A Stable Coin is a cryptocurrency with all its intrinsic functionality, but does not suffer from the vulnerabilities of market fluctuations and price volatilities. They fall into the category of payment tokens, whose main purposes are store of value, medium of exchange, or unit of account. Like other cryptocurrencies, Stable Coins aim to become global, fiat-free money that is programmatically issued and tracked with the use of blockchain technology.

A Stable Coin refers to a class of  cryptocurrencies that is pegged to a tangible, or stable, asset such as fiat money (which is specifically USD) or precious metal (which is generally gold). The idea of backing a cryptocurrency with a tangible asset is to reduce the price volatility associated with standard cryptocurrency. Since the Stable Coin is correlated to the gold or fiat, its valuation is fixed in relation to that underlying asset.

In theory, this makes Stable Coins ideal and usable as a store of value and a basic medium of exchange. They provide cryptocurrency traders and investors with an easy and simple way to keep value without losing to price swings. In doing so, digital coins may become far more practical for everyday use, and it may encourage global adoption.

Models of Stable Coins

To “get rid” of the volatility of the cryptocurrency market, different variations of Stable Coins have been introduced. Thereby a number of alternative types have emerged, backed by a multiplicity of assets, ranging from baskets of cryptocurrencies to physical assets. Most Stable Coins fall into one of the following models: fiat-collateralized, asset-based, crypto-collateralized, or algorithmic.

A. Fiat-collaterised

Fiat-collaterised Stable Coins are the most popular form of Stable Coins. They are fully backed i.e. on a 1:1 ratio by existing fiat currencies in real bank accounts such as the USD that is held in reserve by the Stable Coins’ issuers. The coins represent a claim on the underlying fiat currency.

How do they work?
Stable Coin working is quite simple. They are backed by a company or a central entity. This company or central entity manage the acceptance of new fiat and issues a corresponding amount of the fiat backed tokens. The issuing company holds assets in a bank account or vault (or works with a third party provider that does so on their behalf.  The company or the central entity is the custodian of the fiat reserves, and it backs all the tokens.

A degree of trust in the central entity is created by third-party audits – validating that fiat reserves are kept equal to the token supply. If the holder wishes to redeem cash with his tokens, the company or central entity will wire transfer the fiat money to the holder’s bank account and the equivalent coins will be destroyed or taken out of circulation.

Pros and cons
Stable Coins have a fiat backed structure and their operations and working are simple to understand. Since these are backed by a stable fiat currency, there is not much fluctuation in the prices.

But, these fiat-based Stable Coins are issued by centralized entities with their own governance protocols and, in the case of full custody integration, can be vulnerable  to fraud activities. This is very much against the concept of decentralized crypto. Additionally, not all fiat currencies are stable, as the fiat that underlies them, may not be stable itself.

Examples
Most known examples of fiat money-backed Stable Coins are dollar-based including Tether (USDT), TrueUSD (TUSD), USDCoin (USDC) and Gemini Dollar (GUSD).

 B. Asset-based

Asset-based Stable Coins are backed by some type of commodities. The most common commodity which is collateralized is gold. Gold backed Stable Coin represents a specific value of gold. The physical gold in itself is stored in a trusted third party’s vault.

How do they work?
Asset-based Stable Coins work similarly in cases where the coin is backed by fiat money (see above).

Pros and cons
As these Stable Coins are backed by real assets they provide stability. In a way, the commodity has been tokenized. This brings greater liquidity and price discovery. The coin holder has the advantage of recoursing to the underlying asset. They can redeem these assets at the conversion rate to take possession of the real assets.

Just as in fiat money backed Stable Coins, they are governed by centralised entities. So some of the very concepts of crypto and digital currencies are defeated in this type of stable coin. The holder is dependent on the vendors and custodians. This can result in a single point of failure at some time. This system is also dependent on the audit and assessment by the third party, underscoring the purpose of cryptocurrency.

Examples
Examples of commodity-backed Stable Coins are Digix gold (DGX) and Petro Coin. DGX is dependent on the market value of gold and is fully redeemable at any point in time.  The ownership/custodianship status is tracked on the Ethereum     Blockchain. Petro Coin is a Stable Coin backed by the oil reserves of Venezuela.

C. Crypto-collateralised

Crypto-collateralized Stable Coins are backed by a mix or basket of other digital currencies like Bitcoin or Ether.

How it works
Crypto backed Stable Coins require holders to stake a certain amount of cryptocurrencies into a smart contract which will then result in the creation of a fixed ration of Stable Coins.

In this type of coins, the volatility risk of a single cryptocurrency is reduced and distributed in a group of cryptocurrencies. The Stable Coins are over-collateralized to withstand the extreme price fluctuations.

Pros and cons
The benefit of this method is that it is decentralized and as a result adhere to the trustless, transparency and secure structure of the crypto world. Therefore they are not vulnerable to a central point of failure.

Crypto backed coins are considered transparent because transactions are recorded on the public blockchain with full transparency and accountability. They are efficient in the sense that conversion from one crypto to another is quick as it occurs on the blockchain.

On the other hand they are volatile and complex. Since the underlying asset is a cryptocurrency itself, it is inherently much more volatile as compared to other types of Stable Coins. Also, there are multiple complex elements which can trouble the minting process of these stable coins.

Examples
The most prominent example of crypto backed Stable Coins is Dai. DAI does not rely on any central entity and lives on the blockchain. Its  face value is pegged to the USD. It achieves stability by using an autonomous system of smart contracts.

 D. Algorithmic (or Seignorage) Stable Coins

The most complex and less popular model are algorithmic Stable Coins. These Coins are not backed by collateral at all. Instead, they use various mechanisms to expand or contract their circulating supply as necessary to maintain a stable value.

Algorithmic Stable Coins are based on smart contracts (and other mathematical -based algorithms) where people put up collateral in a cryptocurrency (like Ethereum). This to back the value of a Stable Coin pegged to a fiat currency. With this method, there is no need for know your customer (KYC) measures to be put in place because there is no need for a counterparty to maintain reserves or redeem money from.

How it works
These types of Stable Coins maintain stability using an algorithm. This means that the Stable Coins are not actually backed by real-world assets. Instead, trust in the system is reliant on the expectation that the coins will gain a certain amount of future value (similar to Bitcoin).

These models are generally created with two tokens: the first is a Stable Coin, and the second is related to a bond, thus promising income if the Stable Coin rises in price. By purchasing the bond with the Stable Coin, supply is decreased. As the total demand for the coin increases, a new supply of stable coins are created to reduce price back to stable levels. The main objective is to keep the coin’s price as close as possible to USD 1.

Pros and cons
The advantages of these type of Stable Coin are that they are decentralized, they have an absence of collaterals and lastly, they are kept at stable prices.

On the other hand, these are the most innovative of Stable Coins but also the most complex and thus difficult to create these successfully.

Examples
Basis (formerly known as Basecoin) is an example of this type of Stable Coins. Basis is pegged to the value of USD through algorithmic adjustments of the coin supply. Prices are monitored using the Oracle system.

Use cases for Stable Coins

Stable Coins promise many of the same benefits as other cryptocurrencies – like cheap transactions and rapid settlement – without the price volatility typically found in the crypto markets. Through that combination, Stable Coins could satisfy the demand for high-quality fiat currencies in parts of the world with limited access to the global financial system.

Various use cases have been proposed for Stable Coins, including mobile app payments, alternative currencies in emerging markets and global payment systems. Currently, the most common use of Stable Coins is for crypto traders to move between investment positions seamlessly and create leveraged positions, without added volatility.

Stable Coins also could be useful for crypto exchanges that want to offer fiat-based trading pairs while reducing their engagement with legacy financial institutions. Another interesting use case, is one of coupon and dividend payments in the up and coming digital securities space. This may enable to receive coupon payments in real time via a Stable Coin directly into a smartphone’s digital wallet.

Benefits of Stable Coins

Just like any other cryptocurrency, Stable Coins may offer both benefits and risks  connected to each alternative governance and price-stability models. The main goal that Stable Coins strive to create is an optimal currency in terms of  price stability, scalability, privacy, decentralization and redeem ability.

Unlike Bitcoin or other cryptocurrencies, Stable Coins are more immune to price fluctuations because they are pegged to tangible and more stable assets, like the US dollar (USD).

“An optimal cryptocurrency should have the following four traits: price stability, scalability, privacy, and decentralization.” “Short-term stability is important for transactions and long-term stability is important for holding.” Forbes

“Stable coins are one of the keys to bringing the benefits of cryptocurrencies to everyday people, both in terms of price stability and decentralization of capital.” Rafael Cosman, founder and CEO of TrustToken,

These benefits give it a better chance of mass adoption, compared to existing crypto currencies. This will be especially relevant for people living in countries with unstable monetary systems, where residents are often exposed to hyper inflation and uncertainty.

Stable Coins development could also be of help for the general population in economic and/or political uncertain countries. If the fiat money is converted into Stable Coins it will ensure that the value of money is preserved.

The adoption of Stable Coins may also  support capital market formation and can be used in new applications for decentralised finance on the blockchain. These include lending and derivatives markets because without borders and volatility, it becomes easier to lend money.

Traders and investors can change between cryptocurrencies, without being exposed to  asset volatility. Stable Coins enable traders to keep value stable against a fiat currency, usually the dollar, while they’re in-between trades.

Finally Stable Coins may help in reducing the risk of high price movements. They can be used in the cryptocurrency market as a hedge against bitcoin and other top cryptocurrencies.

 Main risks of using Stable Coins

There are however a number of bottlenecks that could limit the adoption of Stable Coins. First of all, there is the counter-party risk. By trusting a third-party keeping a cryptocurrency stable, the dollars or other fiat currencies could be fractionally reserved instead of fully backed. In this case, a bank run could cause the price of the coin to drop dramatically.

There is also the centralisation risk. Centralisation risks mean the same monetary issues that fiat-currencies face when a central authority has the power to print money without oversight. Accounts can be subject of misappropriation, being blocked, or accessed by unauthorised third parties.

In the case of algorithmic based Stable Coins there is the risk of algorithm manipulations. As most decentralised Stable Coins are embedded  within smart contracts, there is a risk the algorithm which keeps the currency stable fails. Algorithms could even be manipulated by a third-party.

Stable Coins and Regulation

Thus far, Stable Coins have largely been got attention from regulatory agencies. There hasn’t been much discussion in the crypto industry about how U.S. securities and commodities laws might apply to Stable Coins. But also in Europe Stable Coins has got less scrutiny from a regulatory point-of-view up till no. But that may change.

As Stable Coins are seeing greater industry adoption, the US SEC and CFTC will likely take a harder look at their compliance status. But the main question is: how will those Stable Coins be characterised?

Given how dollar-backed Stable Coins are redeemed, the SEC might characterize them as “demand notes,” which are traditionally defined as two-party negotiable instruments obligating a debtor to pay the noteholder at any time upon request. Demand notes are presumed to be securities.

For its part, the CFTC might take the position that Stable Coins are “swaps” under Commodity Exchange Act Section. Under that definition, the CFTC might characterize Stable Coins as options for the purchase of, or based on the value of, fiat currencies.

If Stable Coins are classified as regulated securities or swaps, there could be serious consequences for a large segment of the crypto industry. For example, Stable Coin issuers might have to register their offerings and comply with all the ensuing regulatory requirements. Similarly, a company or fund that conducts or facilitates Stable Coin transactions might have to register as a broker-dealer.

The SEC and CFTC aren’t the only regulators that may take an interest in Stable Coins. Only time will tell how other regulators worldwide will approach the regulation of Stable Coins, particularly if they’re used to avoid trade sanctions or other transaction reporting obligations.

 Asia ripe for Stable Coins

Stable Coins are looking to become a more attractive crypto solution, particularly in the Asia  Region. And that for various reasons.

According to a recent report by Remitscope, more than 50 percent of remittance flows worldwide could be attributed to countries from the Asia Region. Current traditional money transfers however are far from instantaneous or frictionless and often result in the end customer paying unnecessary transaction costs.

With interest growing, a Stable Coin with a well-developed user experience built into the remittance solution would greatly appeal to these markets. In Asia’s emerging markets, the technology’s application in the remittance sector is especially promising. Stable Coins via blockchain technology can improve the speed and stability of these transfers—particularly in countries where financial infrastructure is still in development.

Asian countries are well placed to adopt Stable Coins. It is encouraging that cryptocurrency ATM usage has grown and more cryptocurrency ATMs means improved access to Stable Coins, which will only help the ecosystem mature and evolve for the better.

It is also very likely that we will see more non-USD Stable Coins being tailor-made for Asia. The emergence of more non-USD Stable Coins will signal that the market is maturing further and ready for the benefits of Stable Coins globally.

The regulatory environment, without overt regulatory guidance in jurisdictions,  in the Asia Region is particularly favourable to encourage such innovation.

 What is needed to drive adoption?

To drive Stable Coin adoption, further development is needed in both cryptocurrency exchanges and various cryptocurrency services.

First, making it easy to digitally deposit and withdraw fiat currencies into and out of exchanges remains a huge hurdle to widespread adoption of cryptocurrency as the process is slow and transactions can take a long time or, if they are fast, involve expensive fees.

There is also still a need to solve issues surrounding settlement and velocity in fiat deposits and withdrawals into exchanges. Top exchanges generally take weeks to process transactions and this often leads to increased customer service tickets.

Another issue is the margins on cash to cryptocurrency exchanges. These are very high, sitting at 7-10 percent globally. Not only is it expensive to transact and exchange cryptocurrencies on exchanges, but it is also less convenient when needing to withdraw cash. That is why there is a premium on cryptocurrency ATMs.

Cross-border payments and converting cryptocurrency to cash should be made more convenient for users across the world. Stable Coins could reduce friction when sending money between counterparties as its often quicker, cheaper, and far more convenient.

To improve the user experience, money transfer companies should be encouraged to start integrating cash to crypto features in their respective locations. Overall, consumers will benefit the most from this increase in competition with more options in providers and more locations to conduct their exchanges locally.

In the long term, with more Stable Coins from various other currencies being made available, exchanges could become more liquid, enabling greater efficiency in the crypto ecosystem. Risks for companies dealing with cryptocurrency to fiat gateways will also be reduced as they no longer need to worry about banking relationships and can instead just focus on maintaining a cryptocurrency wallet.

Forward Looking

Stable Coins may have a great potential. The total addressable market for Stable Coins is essentially all of the money in the world, or approximately $90 trillion. Stable Coins are a crucial element in the world of cryptocurrencies, as they can bring stability. They may pave the way for wider acceptance and real potential for global adoption..

The technology is however still relatively young and will continually evolve, but it is clear that demand is there. Before full adoption is reached, Stable Coin developers will need to address the various concerns still in the market. The key is to create the optimal cryptocurrency including features such as price stability, decentralization, scalability, and privacy.

“Stable coins will ultimately give people enough confidence to start using cryptocurrencies for daily transactions.” “Stable coins are trying to strike the balance of not being dependent on a central bank, while also securing price stability”. Brigitte Luginbühl, CEO of SwissRealCoin

Ultimately, decentralised Stable Coins may pave the way for a new and modern  financial infrastructure  that will remove inefficiencies, reduce risk stemming from centralised parties and change the way we transact.

For Stable Coins to be accepted as a viable alternative to fiat currencies, however, they must first intersect and integrate into our current financial infrastructure.

 

 

Carlo de Meijer

Economist and researcher