Lee Reiners, the executive director of the Global Financial Markets Center at Duke Law School, has a firm line on digital financial services. The former regulator is of the general opinion that the crypto boom of recent memory had more to do with loose Federal Reserve monetary policy than the inherent long-term investment potential of such assets as Dogecoin or CryptoDickButt #666. In fact, he thinks that crypto should be banned.

He may well be right. But what exactly is “crypto” anyway?

As one commenter I saw on Twitter put it — at least I think it was on Twitter, but am subject to internesia — you wouldn’t lump together astrology and astronomy and call them “astro”.

Hence I will undertake to try not use the word “crypto” for these new kinds of digital assets in the future. Instead I will refer more specifically on the one hand to cryptocurrency (or “unstablecoins”) and on the other hand to digital assets of some form that are bearer instruments exchanged without clearing and settlement as “stablecoins” when backed by reserves of fiat currency and something else yet to be determined (we’ll come back to this later) when I mean tokens that are backed by real-world assets.

You wouldn’t lump together astrology and astronomy and call them “astro”. Click To Tweet

I will, however, continue to use the word in another context. I am not a lawyer (or IANAL, as the kids say), but my good friend Charles Kerrigan is. And rather a good one at that. He is a partner at the international law firm CMS and wrote a fine article on the word recently. In this, he said that “crypto isn’t a what, it’s a how – a way of doing things”. That is a really good take so from now on, I am only going to use the dread word “crypto” when I mean a way to exchange both fungible and non-fungible tokens directly and in a decentralised manner.

Possession is nine-tenths of the law

Let’s stop talking about crypto and talk about digital assets (tokens) then. Where are they going? We know that the simplistic token maximalist position that if the token is in your wallet then it is yours simply cannot be right. The advocates of these strong digital property rights see computer code as the equivalent of the courts, contracts and correction facilities in the real world. Hence the mantra “code is law” and the idea that the metaverse turns “digital serfs into homesteaders.”

The Law Society of England & Wales, to focus on a key example, has a consultation concerning such matters underway right now. They note that while the law (by which they mean, of course, the law of England and Wales, not the concept of law in general) has to some extent been able to accommodate these new digital assets as objects of property rights, certain aspects of the law now need reform to ensure that digital assets benefit from what the Society terms “consistent legal recognition and protection.”

One thing I learned from reading the consultation, while IANAL, is that there are currently two different kinds of property. The first is “things in possession”, which means broadly speaking assets that are tangible, moveable and visible such as a bicycle or a gold bar. The second is “things in action”, which means property that can only be claimed or enforced through legal action or proceedings, such as debt or shares in a company.

The Law Society rather interestingly proposes to add a third category to allow for what they call new, emergent, and idiosyncratic objects of property rights. I might be tempted to label this category “things in wallets” but they have chosen the more generic “data objects” (rather than, for example, “tokens”.)

The reason that I like the wallet label is that it has connotations of personal control. Indeed, the lawyers say the in the case of these digital objects the factual concept of control (as opposed to the concept of possession) best describes “the relationship between data objects and persons”, which I think is their way of saying “not your keys, not your coins”. I agree with this general point: the owner of the token for a seat at the ball game is the person who controls the private key of the wallet that the token is in.

When it comes to the assets themselves, they say that the law should “recognise and give effect” to the freedom of commercial parties to devise bespoke contractual arrangements. This includes systems in which the holder of a given token is regarded as having legal title to whatever it is that is somehow linked to the token (eg, the seat at the ball game.)

However, being lawyers, that is the beginning rather than the end of the story. They go on to say that holding a token should not necessarily be regarded as a “definitive record of (superior) legal title” to the token. Or, in other words, code is not law and that just because you have the keys that does not make them your coins. And while that may sound like turkeys voting against Thanksgiving, they have a point.


In parallel to the legal consultation, the British government has just published its new Bill on financial markets. This includes reference to regulating both cryptocurrencies and web3 (including stablecoins) in an attempt to guide their transition into the mainstream. The Bill refers to what it calls “digital settlement assets that can be used for the settlement of payment obligations; can be transferred, stored or traded electronically, and use technology supporting the recording or storage of data (which may include distributed ledger technology).”

I think they mean tokens. So, while I’m not enough of an expert on the Law of England & Wales, the regulation of financial markets or decentralised finance protocols to propose a definitive set of definitions at this point, but I think I can say that:

  • John Paul is right: Let us stop talking about “crypto” and talk about cryptocurrencies, tokens and defi;
  • Charles is right and we can use “crypto” to describe is a way of working;
  • The Law Society is right that code isn’t law;
  • The government is right and tokens should be regulated into the mainstream.

If I am right, then we have a platform to build real markets in virtual worlds.

(An edited version of this article was first published on Forbes, 7th September 2022.)

In the Identiverse

The lovely people from Identiverse invited me to chair at a panel at their event in Denver this summer. The panel is now available online at Youtube.

Identiverse panel

Please do drop and listen to a conversation about digital identity with Katryna Dow, CEO & Founder, Meeco; Gopal Padinjaruveetil, Chief Information Security Officer, Auto Club Group (AAA); Johnny Howle, Co-Founder, Disco;  and Heather Vescent, Executive Director & President, IDPro

Stablecoins are electronic money

There is a clear market demand for stablecoins, otherwise they wouldn’t exist. Professor Eswar Prasad, writing in the MIT Technology Review on the future of money, said that “Bitcoin, the cryptocurrency that started it all, may not have much of a role to play in this monetary future” because stablecoins of one form or another might well be more desirable to the average person than volatile tokens for speculators. He also suggests that, rather than leading to a proliferation of public and private currencies that compete on a level playing field, the emergence of digital currency could make economic power more concentrated than ever. If major currencies such as the dollar, the euro and renminbi are available to citizens around the world, they might well displace the currencies of many other nations. Similarly, and in my view just as likely, the digital currencies issued by multi-national corporations might replace weak fiat currencies by exploiting their ecosystems.

So there is clearly a need for proper regulation of stablecoins. Caveat emptor is not a solution. But what might that regulation look like? If you are talking about asset-based stablecoins, then I would argue that a light touch is appropriate. Morgan Ricks, a professor at the Vanderbilt Law School and a former Treasury official, was quoted in the Financial Times as saying that “there’s nothing inherently dodgy about stablecoins. But there is something inherently dodgy about banking, which is why countries build elaborate regulatory regimes to protect deposits”. This is why banking regulations have to be rigorous (and expensive), but stablecoin regulations need not be, because stablecoins issuers do not create money as banks do.

Coming from another direction, the just-published fourth report in the series on The Future of Banking from the IESE Business School identifies payment systems as one of the key challenges for banks moving forwards. It similarly reinforces the need for regulation around stablecoins and highlights the issue of whether fintechs have access to central bank accounts. This is because if a digital currency is to be a substitute for commercial bank deposits, then non-bank issuers must commit to guarantee the one-for-one convertibility with public money. The lack of access to central bank accounts and liquidity facility services complicates such a commitment, which threatens to jeopardise the stability of such alternatives.

Christopher Waller, a member of the Board of Governors of the Federal Reserve System, said earlier this year he was sceptical that a Federal Reserve CBDC “would solve any major problem confronting the U.S. payment system”. I actually agree with the general sentiment here, but I would phrase it in a slightly different way: that there is no “burning platform” for a retail central bank digital currency in the United States. Appropriately-regulated private sector “stablecoins” could be used to satisfy the demands of the decentralised finance (“defi”) sector for money that can be algorithmically-traded for cryptographic assets. Governor Waller also said in a speech last year that “I disagree with the notion that stablecoin issuance can or should only be conducted by banks, simply because of the nature of the liability” and went on to talk about private-sector innovation outside the banking sector that should be given a chance to compete “on a clear and level playing field”.

(It appears that recent proposals from legislators and regulators have shifted attention away from turning stablecoin issuers into insured depository institutions – which was one recommendation made by the President’s Working Group on financial markets in November 2021 – and toward this lighter and more open approach.)

For what it’s worth, I completely agree, with both Professor Ricks and Governor Waller. You do not need to regulate stablecoin issuers as banks (because they will not provide credit) but regulate them something like the existing European electronic money regime. This seems is adequate for fiat stablecoins and, indeed, this is what the UK intends to do.  The definition of “electronic money” under Electronic Money Regulations 2011 (EMRs) will be extended to include fiat-linked stablecoins, with the additional recognition that the holder of a stablecoin may not always have a relationship with the issuer. The holder’s relationship may instead be with a third party (such as an exchange or wallet provider).

I think there is a need for the US, and other jurisdictions, to look at the European example and develop the idea of a regulatory category of Payment Institutions (or whatever they might be called) that can provide services to the public, access core payment systems and issue stablecoins against central bank reserves as an alternative to banks.

NFTs are New Fraud Types

I bought a non-fungible token (NFT) the other day. Not as an investment, I hasten to add. The market for these tradable, from cartoon apes to artsy doodles (as the FT frames them) has collapsed in recent weeks. The average selling price of an NFT has has dropped by around half since their peak before Christmas and volumes on OpenSea, the biggest NFT marketplace, fell by 80% over the last month. I think the line of mug punters waiting for their picture of a chimpanzee with sunglasses has evaporated.

There are those of us who appreciate art rather than speculation, though, so I went to the aforementioned OpenSea to buy something nice. In case you are interested, it is a cartoon from the talented artist Helen Holmes. In case you are an art buyer, this is the one that I bought. It is from her “originals” collection and is now proudly on display in my wallet for all to see.

11 cashorcharge

I commission Helen to draw the cartoons that I use to illustrate my articles on Forbes, so I can testify at first hand that she is real, that the cartoons are originals created by her and that I have the right to use them due to our own agreement. And, I am happy to say, that if anyone buys one of them, the money goes to her, the deserving artist. As it turns out, this makes “my” NFT one of the small number of legitimate examples of same, because recently OpenSea said that over 80% of the NFTs created for free on the platform are “plagiarized works, fake collections, and spam”.

(I say “my” NFT, although owning an NFT doesn’t give me any rights in the underlying intellectual property, which still belongs to Helen, or unique access to the image itself which anyone can download just be right-clicking on the picture above.)

Even the NFTs that are not fakes and frauds are often dodgy, to say the least. I include in this category the NFT of an X-ray of one of the survivors of the Bataclan massacre in Paris, which was offered for sale for $2,776 by the surgeon who treated her. And this isn’t about OpenSea, it’s about the entire market. A recent study found that “the top 10% of traders alone perform 85% of all transactions and trade at least once 97% of all assets”. Looking at the numbers, the top 10 percent of “buyer–seller pairs” are as active as everyone else combined. It is market almost completely captured by whales.

When the platform that sold the NFT of Jack Dorsey’s first ever tweet for three million American dollars halts most transactions because counterfeit creators were selling tokens of content that did not belong to them, then I think we can all agree that there is a fundamental problem in the digital assets market.


It looks as if NFTs are providing a platform for innovation in fraud as well as innovation in creative works. One of the most common kinds is what is known as “wash trading”, where groups of fraudsters trade an NFT between themselves, for an ever-higher price, until someone who is not part of the group and who thinks that the price is real (in colloquial English investment banking parlance, such individuals are known as “mug punters”) steps in to buy the “art”. At which point, the group split the proceeds between themselves, rinse and repeat. 

This kind of trading is rampant. OpenSea was recently overtaken in volume by LooksRare. LooksRare financially rewards users for their trading volume, which predictably means rogues gaming the system. Crypto analytics firm CryptoSlam estimated that more than four-fifths of the total trading volume since launching is in fact wash trading.

(Interestingly, a detailed Chainalysis study of the problem discovered a strong asymmetry: Most wash traders have been unprofitable, but the successful ones have profited so much that, as a group, wash traders have profited immensely.)

Having said that NFTs are a platform for innovation in fraud, I am forced to admit that I sometimes admire the ingenuity of some of the crypto hackers/loophole exploiters who have been getting work in this new world. Take, for example, the OpenSea “loophole” that was exploited because some NFT owners were unaware that their old sale listings were still active. These old listings were found, and the NFTs were purchased. This led to the loss of multiple expensive NFTs at rock bottom prices. The problem is that the NFTs were getting sold at old offer prices made when the NFTs were much less valuable. To give a specific example, one attacker paid a total of $133,000 for seven NFTs before quickly selling them on for $934,000 in ETH. (Five hours later this ether was sent through Tornado Cash, a “mixing” service that is used to prevent blockchain tracing of funds.)

As Tom Robinson of blockchain analysis company Elliptic explained, this ingenious (although I have to say, not that complex) fraud then led on to an even more fun fraud because OpenSea sent an email to users who still had old NFT listings, and were therefore susceptible to this fraud. However, cancelling the old listing requires an ETH transaction so the enterprising freelance alternative finance enthusiasts behind the original fraud then created bots to look out for these particular transactions and front-run them to purchase the NFTs before the listing was cancelled. In other words, by trying to be helpful and tell users to cancel the vulnerable listings, the marketplace gave away precisely the information need by the perpetrators to automate their attacks.

Scale and Scope

Not all frauds are particularly complex. An awful lot of money has been lost to very basic frauds such as the “rug pull”, whereby innovative cryptocurrency engineers announce the realise of a fabulous new digital asset that will do amazing things in the future, increase 100x in value in next to no time and cure cancer on the way. The public respond with enthusiasm and deluge the issuers with cash, at which point the issuers vanish, deleting their web site, Telegram chat and phoney LinkedIn profiles on the way. The public let the virtual cats out of the virtual bags and discover that they are left with nothing.

(MonkeyJizz was a scam! Who knew!)

There are frauds, though, that take more advantage of the nature of the new infrastructure. The “honeypot” is one such example. In a honeypot, the programmer of the smart contracts that control a new token inserts surreptitious code to ensure that only their own wallet can sell the tokens. Everyone else’s money is stuck in the honeypot while the scammer who created the tokens can sell at any time.

Mention of honeypots takes us on to the main point. Many of the most notable frauds that abound involve decentralized finance, or DeFi, projects, with more than $10 billion lost to DeFi theft and fraud last year. The ability to automate fraud in the DeFi space is a fascinating and terrifying development because of the sheer scale of the frauds that can be perpetrated but automated fraud is not limited to the web3 world, of course. PayPal (PYPL) recently closed 4.5 million accounts (and lowered its forecast for new customers) after discovering that bot farms were exploiting its incentives. The payments had offered $10 as an incentive to open new accounts, at which point the bot farmers stated tilling the PayPal fields.

The combination of automation and complexity is toxic and needs to be tackled up front. But how? Surely it should be one of the most basic tests of eligibility for a payment account that you are an actual human being! How is it so difficult to ensure that certain transactions are executed by people and not by bots! I hate to say it yet again, but the way forward is through a working, fit-for-purpose digital identity infrastructure. It should not be possible to open an account without an IS_A_PERSON credential, which as I insist on forecasting, will one day be the most valuable credential of all.

Some people still rob banks!

I remember sitting through a discussion about the security of a proposed new payments security in an online meeting recently when one of the people round the metaphorical whiteboard said something about “John Dillinger’s famous quote” that he robbed banks because that’s where the money is.

Due to my obsessive nature I was forced to immediately halt the proceedings and annoy all participants by pointing out that the pithy maxim is nothing to do with the much-celebrated former public enemy no.1, who was shot dead by the FBI in 1934, but is in fact generally attributed to another noted criminal from the era of bank branches, leather wallets and physical cash: “Slick” Willie Sutton.

That famous phrase “that’s where the money is” dates to 1952, when it appeared in a Southern Californian newspaper. Today it is so commonplace that social scientists have dubbed the process of considering the obvious first as “Sutton’s Law”. In his autobiography, however, Sutton denied ever saying it!

(In fact, and more interestingly in my opinion, in that same autobiography he wrote “Why did I rob banks? Because I enjoyed it”.)

Dillinger and Sutton are figures from a bygone age, when the people who robbed banks didn’t work for them. Click To Tweet

Today when most of us think about bank robbery, we think about people inventing complex derivatives and amassing fortunes while the institutions that house them amass fines, bankruptcies and bailouts. But it turns out that your grandparent’s bank robberies are not entirely extinct. American Banker says that violent bank crime has indeed become increasingly less common in recent years (although it ticked back up in the middle of the last decade) but there were still 1,788 bank robberies in the US in 2020, the most recent year for which FBI statistics are complete, compared with 5,546 ten years ago.

(By comparison, in largely cash-free Sweden, there were five bank robberies in 2020, down from the the 2011 peak of 43. Only three of these were armed robberies.)

In the fintech age, there are really only two ways for armed robbers to go. They either have to scale up, or look at adjacencies. So where can look for a glimpse into those strategies? Well, Brazil is a hotbed of fintech innovation (the noted investment outfit Berkshire Hathaway has just dumped shares in Visa and Mastercard and has bought $1 billion in shares of the Brazilian digital bank Nubank) so that seems a reasonable place to look for what economists call weak signals for change. Here are two I found to illustrate the point.

First, scale. Banks branches just don’t have that much money in them, so given the fixed costs of shotguns, balaclavas and hideouts, it makes senses to rob a bunch of them at once. Armed robbers in the city of Araçatuba, a few hundred miles north-west of São Paulo, decided to scale up in this manner. They cut off key access roads to the city with burning vehicles, attacked the local military police station and placed some 40 explosive devices at 20 different locations around the city. Then they robbed multiple banks and escaped by tying hostages to their cars as human shields.

The alternative is to look for adjacencies where core skills and sunk costs can be exploited. This appears to be the route taken by many Brazilian armed robbers who have decided to move into the electronic age by kidnapping people off the street and then forcing victim’s families to send them money by credit transfer using the new Pix instant payments platform. In fact this mode of operation has become so common that the central bank has been forced to restrict the use of the instant payments platform and if a bill in the São Paulo Legislative Assembly becomes law, it will prevent financial services providers and payment institutions from processing payments through Pix at all until the Central Bank improves consumer protection.

(Pix is the instant payment system launched by Banco Central do Brasil in October 2020. Funds can be transferred between checking, savings or prepaid accounts in seconds. Anyone with a ID and a mobile phone can use the service, which has been a huge success, with something like tw0-thirds of the adult population using it. It carries about three-quarters of the nation’s transactions.)

The end of cash doesn’t mean the end of crime. But it does mean that we have to do proper risk analysis on its replacements, whether these are going to be electronic money (eg, instant payments in the UK, where authorised push payment fraud is out of control is already more than card fraud), electronic cash (in the form of public or private digital currency) or cryptocurrency.

(This is an edited version of an article first published on Forbes, 25th January 2022.)

Tokens are tulips or teabags or…

Many years ago, at the height of the Dotcom boom, I was involved in a couple of consulting projects advising investment banks on technology infrastructure. I can remember that in one of the teams I worked with at that time had a generic dismissive term for nonsensical dot com startups that had no sustainable business model and were created simply to fleece retail investors in IPOs while rewarding their investment banking chums. This was “”.

Whether it is now politically-incorrect to use the term or not I am not certain (I am sure that social media will let me know pretty quickly) but it still pops up in my head when I read about some new non-fungible token (NFT) jape, which is almost every day at the moment. I’ll see something about a machine generating pictures of chimpanzees with assorted random sunglasses on and just file it away under usedcondoms.eth and think no more about it.

I discovered that used condoms do have a sustainable business model associated with them after all. Click To Tweet

Unfortunately I am going to have to train myself in some new terminology, since I discovered that used condoms do have a sustainable business model associated with them after all. The police in Vietnam discovered a working operation in the province of Binh Duong following a tip off. Instead of praising the freelance prophylactic entrepreneurs for their valuable ecological stand against single-use disposable consumer products, the forces of law and order raided their warehouse and confiscated a few hundred kilos of bags stuffed with more than 300,000 recycled condoms. According to news reports, the condoms had been boiled, dried and reshaped with a wooden prosthesis. The warehouse owner, a 34-year-old woman who said she received a monthly delivery of used condoms from an “unknown person”, came clean on the economics: she got 17 cents for every kilo of recycled rubbers, so the police had confiscated a substantial amount of her dongs (in fact, about a week’s worth at average wage).

I think I’m going to have to choose a more British epithet and ask whether NFTs are going to be another Paypal or another* or whatever.

Listen to the Flower People

Actually, I think a more useful analogy is tulip bulbs. As you will have noticed, discussions about Bitcoin frequently refer to the well-known speculative mania of the Amsterdam “tulip bubble” in the 17th century. But as I pointed out in Forbes last year, that was not a mass market mania but speculation by a small group of rich people who could well afford to lose money. What’s more, when the bubble popped it left behind a more efficient and better regulated financial market that played a significant role in creating the Dutch golden age. So great was the impact of this more efficient financial intermediation that balances at the Bank of Amsterdam became a pan-European currency and, as noted in an Atlanta Fed paper on the subject, the Dutch florin played a role “not unlike that of the U.S. dollar today”.

So, saying that NFTs are like the tulip bubble is, in fact, saying that a relatively small number of people will lose a lot of money, but the long term outcome will be a more efficient financial system, which is pretty much what The Economist meant when it observed that “because tokens can be digital representations of nearly anything, they could be efficient solutions to all sorts of financial problems”.

When I’ve spoken to serious finance people about tokens they have all pretty much said the same thing: when the regulatory structure is in place, they will tokenise everything. Everything.

* Uh oh. I’ve just discovered that there are in fact 27 things to do with used teabags, so I’m going to have to go back to drawing board (well, bath) and come up with something else sharpish.

Cities and states in a connected world

Ethereum inventor Vitalik Buterin recently wrote that while many national governments are “inefficient and slow-moving” in adjusting to changes in the needs of populations (and, I might add, environments), cities and states have the potential to deliver much more flexible and dynamic responses. Vitalik focused in particular on cities, observing that there are great cultural differences between cities and therefore it is easier “to find a single city where there is public interest in adopting any particular radical idea” than it is to find, or convince, whole nations.

This is a fascinating perspective, and one that I have much sympathy for. In my 2017 book “Before Babylon, Beyond Bitcoin” I suggested that the multiple monies of the future will be linked to the multiple communities we will inhabit and that there were reasons for thinking that the city identity might well turn out to be the most important. Cities as well as being the focus for economies and economic growth are above all physical locations and, as I recall the futurist Gill Ringland suggesting in her financial services scenarios for 2050, the ability to enter, do business and to reside in desirable cities will become a valuable right and the basis for one of a number of demographic asset classes. There was an illuminating Financial Services Club discussion about this in London last year, where the even more expansive view that cities might begin to dictate the policies and trajectories of the nation state was put forward.

This is the age of cities, not of national economies. Click To Tweet

In this context, Gill’s prescient narrative of the C50 (the organisation of the 50 richest city-states that will replace the G20 as the mechanism for “managing” the world economy), forms a solid narrative around the future economic organisation of a successful, functional world. As the respected commentator Martin Wolf wrote in the Financial Times some years ago, “this is the age of cities, not of national economies” (and he want on to say that “it is high time London became a true city state”).

These views may have seemed fanciful to readers then, or indeed now, but I am not so sure they can be easily dismissed. CityCoins, which is a startup backed by Balaji Srinivasan and others, is launching MiamiCoin, a token that raises money for the city while allowing its holders to earn mining and staking fees. According to the company, MiamiCoin has already raised $21 million and there are plans to launch an NYCCoin as well. (Ahead of the curve, Akron OH as been experimenting with a city coin to reward citizens for shopping locally and there have been similar initiatives in the UK, such as the Brixton Pound.)

This was foreseen by the wonderful Jane Jacobs’ in her book “Cities and the Wealth of Nations” that was published way back in 1984 and my Jacobs-influenced city-centric perspective was reinforced when I happened to read a Canvas8 report “The city an an identity anchor” (which echoed Gill’s points about identity) and the World Economic Forum (WEF) 2017 report “Cities, not nation states, will determine our future survival“. The first C50 meeting can’t be that far away and I’m sure that money will be on the agenda.

If the economy shifts and people find themselves in a depression, then more cities and their hinterlands may well decide to decouple themselves from national and supra-national currencies in order to manage their own monetary policy on the road to recovery.  What’s more, the pandemic means new thinking is acceptable and many people are looking toward city-centric means of exchange as a specific kind of complementary currency that may contribute to rebuilding economies, and on the other hand the technologies of money have advanced considerably in recent years as the electronic money evolutionary tree has grown and flourished. Brixton bank notes might be pretty, but a Brixton app makes more sense, especially in the post-pandemic contact-free retail environment of the future.

Is Vitalik on to something? I think he is. Would such competing currencies really be a big problem? If I live in London and use London Loot for the train, for lunch and at the supermarket, is it such a big deal to convert it to Chicago Cabbage or Bronx Bucks to buy something online? Especially when your phone does it for you and an AI f/x bot is vigilant on your behalf to get the best prices? I don’t think so. Your phone could trade a million different currencies in the background while it is displaying the price of your coffee and bagel in LA Lolly, which is the currency that makes sense to you.

The idea that countries should have currency will soon seem as quaint as the idea that countries should have an airline. Some will have none, some will share, some will have several and life will go on.

Unbank the banked

Around the world there are hundreds of millions, billions of unbanked people. But why are so many people unbanked? It can’t be because there is a shortage of banks as there are more banks, challenger banks, neo-banks and near-banks than you can shake a stick at. There must be some other problem and, as the old saying goes, where there is a problem there is an opportunity. It’s a pretty big opportunity, too. The Economist summarises the situation in America as follows: access to banks can be costly and seven million households are unbanked, relying on cheque-cashing firms, pawn shops and payday lenders.

So what should be done? Let’s start by talking about the people who want a bank account but can’t get one because they lack the necessary identification documentation or perhaps other skills needed to function in that mode (eg, literacy). These are the true unbanked. As Wired magazine pointed out, basic bank accounts (which are mandated by the UK government) are accessible to those with poor credit histories, while niche banks including Revolut and Monzo do not usually ask potential customers for proof of address in order to open an account. So it seems reasonable to ask why almost two million British adults still do not have a bank account, never mind adults in emerging markets!

Maybe it’s because banks don’t provide anything useful for them. Think about the large numbers of people who are banked (but also use the products and services provided by fintechs, such as myself) and the people who are underbanked: the people who have a bank account but don’t really want it and don’t use the services offered because the bank account is an 18th-century product designed for a bygone age. Professor Lisa Servon wrote “The Unbanking of America” about this a few years ago, based on her experiences working in a check-cashing operation in New York (I cannot recommend this book highly enough), and the bank experience hasn’t changed much since then.

There’s a very interesting take on all of this in Charlotte Principato’s note on “How the Roughly One-Quarter of Underbanked U.S. Adults Differ From Fully Banked Individuals” over at Morning Consult. This goes into the demographic details of the fully banked, unbanked and underbanked U.S. population and is serious food for thought. In her survey, underbanked people were defined as having done at least one of three activities with a provider other than a bank or credit union in the past year: purchased a money order, paid bills or cashed a check. It is interesting to note that most (58%) of underbanked consumers say they could manage their finances just fine without a bank!

We have a situation, in fact, where some of the banked, most of the underbanked and all of the unbanked are turning to alternative providers because banks cannot or will not deliver the services that these customers want. Let’s together label these the “underserved”. I think the majority of adults are now underserved (prove me wrong!) and therefore continue represent an astonishing range of scale and scope opportunities for non-banks.

Serve The Underserved

Bank accounts are quite expensive things to run (as they should be, because banks should be heavily regulated). In some countries the banks are forced to offer a basic bank account to anybody who can jump the identification hurdle to get one. But a great many of these customers won’t be very profitable and it costs the banks a lot to serve them. Why continue to force banks to provide money-losing services to people who don’t want them anyway?

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with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

What the underserved need are not banks but new kinds of regulated financial institutions that deliver the modern services needed to support a 24/7 always-on economy. What are these services? As the economist John Kay noted in his recent paper on “A Robust and Resilient Finance” for the Korean Institute of Finance, while “many aspects of the modern financial system are designed to give an impression of overwhelming urgency… only its most boring part – the payments system – is an essential utility on whose continuous functioning the modern economy depends”.

In similar vein, in their new book “The Pay Off-How Changing the Way we Pay Changes Everything” Gottfriend Leibrandt (who was CEO of SWIFT from 2012 until 2019) and Natasha de Teran write that “while access to a banking system is seen as a crucial part of a country’s development and necessary for lifting people out of poverty, it is not as basic a need as the ability to pay”.

In other words, the fundamental need and the basis for inclusion in society is not a bank account or anything like it, but a safe and secure way to get paid and to pay for goods and services. And this is not a revelation! It seems to me that great many people would be well served by a simple digital wallet that might be provided by any of range of organisations from Facebook to Square. The goal of a modern and forward-looking strategy should be not to bank the unbanked but to unbank the banked.

(An edited version of this piece first appeared on Forbes, 11th September 2021.)

Open Banking Is Heading Stateside

The Biden Executive Order on promoting competition contains a number of very interesting provisions. Some of them, such as the initiative to require airlines to refund fees to passengers who get bad wifi or whose baggage is lost, seem unlikely (from my inexpert perspective, at least) to strike a blow against sclerotic corporatism and re-energise late state capitalism to the benefit of all throughout society. On the other hand, some provisions, such as the “right to repair”, might have very signification implications for everything from tractors to iPhones.

The main reason I am interested in the bill, though, it is that is contains a very specific provision on banking that could mean structural change in the US’ financial services sector. This is the provision that calls for the Director of the Consumer Financial Protection Bureau (CFPB) to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new and innovative products in ways “consistent with the pro-competition objectives stated in section 1021 of the Dodd-Frank Act”.

The Biden Executive Order calls for the portability of consumer financial transaction data. Good. Click To Tweet

(The decade old Dodd-Frank law actually gave consumers the right to access their own financial data but the CFPB has not yet defined that standards that would enable, although it did start the rule making process last year.)

Now, the US already has a form of open banking. There are companies such as Plaid and Yodlee who share customer data with banks and fintechs. But these are through bilateral agreements. For example, Plaid just reached an agreement with Capital One to stop screen scraping and use Capital One’s APIs. But this is by agreement. Under the new provisions, the banks will be required to provide mandatory API access. Now, this means all sorts of standards and such like because the CFPB will have to balance competing requirements from the various stakeholders to make sure that it gets it right on (eg) privacy. This will take some time, but it is coming, and it a good thing.

I could not agree more with the economist Tyler Cowen who commented plainly that the portability of bank account information is of significant benefit to the stakeholders and I am sympathetic to those (generally more progressive) voices calling for a maximalist interpretation of the data portability provisions. If you could move from one bank to another at the press of a button, and take all of your data with you, that would certainly encourage competition from new players.

NFT available direct from the artist at TheOfficeMuse (CC-BY-ND 4.0)

But how to achieve this? The obvious way forward would be to introduce open banking along the lines now familiar in many other jurisdictions: mandate that all financial institutions about a certain size implement a common set of APIs with a prescribed set of basic functions so that consumers can give permission to other regulated organisations to have access to their data.

The API Opportunity

Banks should respond to this challenge by seeing it as an opportunity to provide new products and services that are not simply a passthrough of the current financial products and services. If we use the simple layering of manufacturing, packaging and distribution of financial services to look at dynamics while assuming that banks want something more than low-margin manufacturing (but will find it hard to compete with distributors as the embedded finance bandwagon rolls on) then we must conclude that they should take packaging seriously.

To do this, they could focus on the APIs themselves and opt to invest in this layer to find new sources of revenue, better returns than pure manufacturing and, and this should not be underestimated, ways to remain relevant to the spectrum of distributors in the new economy. I’ll give an example of this later, but first let us resort to the traditional tool of the jobbing consultant and make a two-by-two matrix.

On the horizontal axis we distinguish between the APIs that are mandatory (in a regulated open banking regime, or table stakes in a market-driven regime) and non-mandatory or optional APIs that might be the basis of a more competitive approach.

On the vertical access we distinguish between APIs that are related to making transactions (these are what are generally referred to as “write” APIs) and APIs that are related to information gathering (these are what are generally referred to as “read” APIs).

Api 2x2

It doesn’t take a very detailed analysis to realise that focusing on the quality and grade of service for the mandatory APIs (in order to make the bank platform more attractive to distributors) makes more sense than trying to invent new ones and then trying to persuade regulators to make them mandatory. When it comes to non-mandatory APIs, on the other hand, it makes sense to invest in creating new APIs that customers will want to the point whether they will even pay for them.

If we focus our efforts on the APIs that relate to information that is not directly related to the financial products, I think we can see the outlines of competitive strategy around those non-mandatory read APIs and an obvious element of that strategy rests on identity, authentication and authorisation services. In other words, a digital identity strategy might provide a means for banks to stay part of transactions in the modern economy.

The UK Lesson

Just to illustrate how the open banking sector might evolve, take a look at the trajectory in the UK, where although only the largest banks were required to implement open banking (the “CMA9”, as they are called, because it was the Competition and Markets Authority that set the mandate) there are now some .

Investment is flowing in. Yapily (who I use almost daily, because they connect my Quickbooks to my bank accounts and credit cards) just raised $51m for European expansion and another of the main open banking “packagers”, TrueLayer raised a $70 million Series D earlier this year. At the time, the CEO of TrueLayer observed that they were redefining how people transact online, saying that “We’re building an Open Banking network that brings together payments, data and identity” and (my emphasis).

Incidentally, I note with interest that in the UK what we used to refer to as the non-mandatory APIs have now been labelled “premium” APIs in recognition of the underlying strategic drive. Thus while I agree with the point often made by banks that open banking does not present them with a level playing field (whether they deserve a level playing field or not is another topic entirely), I seems to me that it also presents them with a great opportunities.

Finally, another area where the lessons learned from the UK can be very valuable in America is the scope of the provisions themselves. The UK’s “mid-term” report on “Consumer Priorities for Open Banking” set out just why it is that open banking by itself delivers quite limited benefits for consumers. What is needed is open finance, a view expressed by the US Center for Financial Services Innovation (now the Financial Health Network) in their report on “How Industry Executives View Financial Health”. Again, to use a UK example, open banking is a first step. Nationwide (one of the CMA9) has partnered with another of the packagers, OpenWrks, to pull together information from different accounts and sources to build a more complete picture of the financial circumstances of customers facing financial hardship and therefore find better ways to support them.

The US should take on board these positive visions in response to the Biden executive order to create a financial sector that takes a more complete view of a customer’s situation and provides services that increase the overall financial health customers. I’ve written here in Forbes before about the strong narrative that this can provide for a next generation of fintechs: to stop providing financial services and start providing financial health, to force banks and other manufacturers and to innovate and compete, and to give an accessible vision to the pro-competition drive in the administration.

(This is an edited version of an article that first appeared on Forbes, 20th July 2021.)

Brazilian stripe adventure

The news that the magnetic stripe is going to start disappearing from our credit cards, and only a decade or so after I began questioning the need for it to be on any of my cards at all, brings so many memories of my life in payments to the fore that there has been a tear in my eye all morning.

For many years I had a lot of fun complaining about America’s attachment to the magnetic stripe and chronicled the transition through to chip cards, contactless and mobile phones. That transition still has some way to go, incidentally, because unlike most of the world where, to all intents and purposes, all in person card payments are made using chips, as of last year only around three quarters of US transactions were executed in this 21st-century mode.

For many years I had a lot of fun complaining about America's attachment to the magnetic stripe *wipes away tear* Click To Tweet

I’ll find a few key chip and stripe stories to post out on social media over the next day or two just in case any chroniclers of the payments industry are collecting anecdotes, but for now I’ll just focus on one true story that was brought to mind by a comment from my old friend Charles Arthur who was asking about the use of stripe and chip cards in developing countries.

A few years ago, and already a few years after I had been enjoying the fact that Kazakhstan was migrating to chip and pin when Kansas wasn’t, I had to go to São Paulo for a few days to work with some of the Brazilian banks. I can’t remember why, exactly ,but I think it was something to do with mobile payments. Anyway, when it came time for me to leave I found a taxi and set off for the airport.

While pottering along the freeway I remembered that I didn’t have any cash with me, because I never do, and so I wanted to know if the taxi could take payment by card. I took out my wallet and gestured at a credit card and looked quizzically at the driver. The driver signalled and turned off of the freeway onto some side roads. After a few minutes of driving through a retail area, which is mainly shoe shops as I recall, we turned off again onto some smaller roads and went into a distinctly shady part of town.

At this point I began to panic slightly.

Cursing my stupidity for waving around a wallet full of cards and naturally assuming that I was about to be robbed, I began to calmly assemble my tactics. I figured that so long as I could retain my passport then things would be okay. After all, credit cards could be replaced by the banks (as indeed they often were at though at that time) and the computer belonged to the company not me, so whatever. I surreptitiously removed my passport from my jacket pocket and hoping that the driver would not notice, slid it down my leg and into one of my socks where I hoped it would remain throughout my impending ordeal.

The car pulled up at a shack that looked for all the world like a bandit headquarters from Mad Max and the driver shouted something to the unseen denizens. I thought for a moment about trying to make a run for it but realised I wouldn’t really get very far and would likely only inflame the situation, so I stayed put to await the inevitable. Sure enough, a young man dressed in jeans and some sort of football shirt came out from behind the shack and jogged towards the car with something metallic in his hand.

He reached the car and pulled open the door and thrust toward me, glinting in the sunlight… a chip and pin terminal.

I put the card in, punched in my pin, waited for my receipt and continued to the airport.

I’m reasonably well travelled and in the last few years I’ve been to countries ranging from El Salvador to the Ivory Coast and from Bulgaria to Krzygstan and I can honestly say that I have no memory of using a magnetic stripe terminal anywhere except in the USA. I’m pretty sure that the last time I ever used a card to pay with the magnetic stripe ever was in a coffee shop in a hotel in Las Vegas. I remember this because I had to go back to my room and get my passport so that they could write the passport number on the receipt.

IMG 4778

Ah, those were the days.