Can blockchain help legacy fashion brands win over Millennial and Gen Z consumers? | Luxury Adviser

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However, blockchain technology offers a solution to this challenge. Blockchain – in combination with technologies like Near-Field Communications (NFC) and Internet of Things (IoT) – provides an indisputable record of the truth that is uniquely capable of showing Millennial consumers that the goods they buy benefit everyone involved in their production.

From Can blockchain help legacy fashion brands win over Millennial and Gen Z consumers? | Luxury Adviser.

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Customers will have access to the lifetime history of a product – including when and where it was designed, from where the raw materials were sourced and whether it has been previously owned – before they make a purchase.

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By fitting garments with NFC tags and using blockchain to seamlessly record all activities related to those garments on an immutable ledger, fashion brands will be able to build a secure and permanent record of each clothing item.

 

From Can blockchain help legacy fashion brands win over Millennial and Gen Z consumers? | Luxury Adviser.

 

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Some two-thirds of consumers worldwide say they would switch, avoid, or boycott brands based on their stance on controversial issues.

 

From The influence of Gen Z on fashion | McKinsey.

 

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For planning purposes, then, we can assume that a few years from now all items will have EPCs
on them and anyone will be able to read those EPCs. If I see a Gucci handbag on sale in a shop,
I will be able to point my Bluetooth EPC-reading pen at it1 and read the EPC. My mobile phone
can then tell me that the handbag is Gucci product 999, serial number 888. This information is,
by itself, of little use to me. I could go onto the Gucci-lovers web site and find out that product
999 is a particular kind of handbag, but nothing more: yet I need to know more to make a
decision about whether to buy the bag or not. I may know that the tag is “valid”, but that
doesn’t tell much about the bag. For that, I need more data.

The EPC network architecture defines the infrastructure for finding that data. Organisations that
read EPCs (eg, a retail chain) will have networks of servers that collect the tag data and turn it
into meangingful information2. These servers (called “savants”) can then use this information to
query corporate databases: these databases can then query other databases. There’s an XML
schema, known as “physical markup language” (PML) that they can use to talk to each other.

If I wanted to know if the handbag is real or fake, then I need to have access to its provenance
(known by that savant network) as well as its product details. The provenance may be
distributed quite widely across the network. The retailer’s database knows which distributor the
bag came from, the distributor’s database knows which factory the bag came from and Gucci’s

1 These are already on sale.
2 They actually turn it into a pointer to meaningful information but it’s logically the same thing.

mkt.046/50/1
© Hyperion Systems Limited (2004) Page 3 of 5 (28/10/04)
RFID Product and Brand Protection
by Dave Birch

database should know all of this. I need access to this data to get the data I need to decide
whether the bad is real or fake.

All well and good, but why would the retailer, the distributor or Gucci tell me? How do they
know whether I am a retailer, one of their best customers, one of their own “brand police”, a
counterfeiter (who would love to know which tags are in which shops and so on) or a law
enforcement officer with a warrant?

The technology to solve that problem already exists: smart cards and digital signatures. A Gucci
brand policeman might have a Bluetooth pen tag reader connected to a PDA with a smart card
and a GPRS connection. They could then point the pen at a bag and fire off a query: the query
would have a digital signature attached (from the smart card) and the Gucci savant could check
that signature before processing the query. Gucci could then send a digitally-signed and
encrypted query to the distributor’s savant which would then send back a digitally-signed and
encrypted response to be passed back to the brand policeman: “no we’ve never heard of this
bag” or “we shipped this bag to retailer X on this date” or “we’ve just been queried on this bag
in Australia” or something similar.

The central security issue for brand protection is therefore the protection of (and access to) the
provenance data. It is this area that demands industry attention. The foundation of the “privacy
settlement” between government, business and the public must be open: every stakeholder must
understand how, why and when savants will be allowed to answer queries and under what
circumstances they will send a result (and who they will tell they sent the result to, for later
auditing).

Looking Forward

The purpose of this article is not to reiterate the widely-expressed concerns about security and
privacy in the EPC world, but to point out that if the world of product and brand security is to
capitalise on the worldwide deployment of EPC it will have to tackle these issues in an open way
to find a privacy settlement that works. Many of the questions that need to be answered to reach
this settlement are not much to do with technology and almost nothing to do with tags. Should
customers have the right of access to the provenance of their purchases? Should retailers have
access only to the provenance of the finished product they are selling or all of its components?
Should there be one tag or many? This last question is important. Since EPCs are not (in
themselves) secure, the future may see the use of multiple tags. One could envisage high-value
or controlled goods having both a simple EPC tag for tracing (linked to savants) and a
microprocessor tag (perhaps even one that can remember where it’s been, what the temperature
was and so forth) linked to private databases.

Finally, it is important to note that the primary purpose of EPCs is not and has never been brand
protection and they are not the “silver bullet” for brand protection that companies such as
Procter & Gamble are looking for [11]. Having said that, there is no doubt that brand protection
can be significantly enhanced by exploiting EPCs stored in RFID chips in the right way and that
organisations should begin developing their strategy for that exploitation.

 

While flicking through British Vogue magazine for some moisturising tips, I came across a mention of digital identity! I was surprised and delighted that (just as has happened another of my obsessions, Dungeons and Dragons) what was once the province of nerds and outsiders has become fashionable and cool. Hurrah! Vogue says that secure digital identities for luxury goods are crucial, which is great! I could not agree more. Digital identities are not only for people! I have been writing about the need for digital identities for things for many years, and not only for high fashion (a field where, oddly, I have some experience in the use of NFC applications. On mobile phones to scan designer clothes – but that’s another story).

 

 

Some years ago I asked if “the blockchain” (put to one side what this might mean for a moment) might be a way to tackle the issue of “ID for the Internet of Things” (#IDIoT). I said at the the time that I had a suspicion that despite some of the nonsense going on, there might be something there. My reason for thinking that is that there is a relationship between blockchain technology and IoT technology, because we need a means to ensure that virtual representations of things in the mundane cannot be duplicated in the virtual. As I saw it, there were three ways to do this: a database, tamper-resistant hardware or blockchain.

If we look at the database idea first, I explored this more than a decade ago using the example of luxury goods such as watches and asking how would you tell a fake Rolex from a real one. It’s a much more complicated problem than it seems at first. For example: why would Rolex care? I can’t afford a Rolex, so if I buy one at a car boot sale or in China, Rolex isn’t losing a sale. But by wearing the fake, I’m presumably advertising the desirability of a Rolex. So surely they should be happy that people want to wear fakes or not? And if I did have a real Rolex, would I want to wear it in dangerous places where expensive watches get stolen in broad daylight by muggers (eg, London, London or London) or where I might just lose it?

Anyway, regardless of the reasons for it, let’s think about how to tell the real thing from the fake thing using technology. Suppose RFID is used to implement Electronic Product Codes (EPCs) for luxury goods. If I see a Gucci handbag on sale in a shop, I will be able to point my Bluetooth EPC-reading pen at it and read the EPC, which is just a number. My mobile phone can decode the number and then tell me that the handbag is Gucci product 999, serial number 888. This information is, by itself, of little use to me. I could go onto the Gucci-lovers website and find out that product 999 is a particular kind of handbag, but nothing more: I may know that the tag is ‘valid’, but that doesn’t tell much about the bag. For all I know, a bunch tags might have been taken off of real products and attached to fake products.

To know if something is real or not, I need more data. If I wanted to know if the handbag were real or fake, then I would need to obtain its provenance as well as its product details. The provenance might be distributed quite widely. The retailer’s database would know from which distributor the bag came; the distributor’s database would know from which factory the bag came and Gucci’s database should know all of this. I would need access to these data to get the data I would need to decide whether the bag is real or fake.

This is a critical point. The key to all of this is not the product itself but the provenance. A database of provenance (for example) is the core of a system to tell real from fake at scale.

Who should control this database, and who should have access to it, is rather complicated. Even if I could read some identifier from the product, why would the retailer, the distributor or Gucci tell me any about the provenance? How would they know whether I were a retailer, one of their best customers, one of their own ‘brand police’, a counterfeiter (who would love to know which tags are in which shops and so on) or a law enforcement officer with a warrant?

This is where the need for a digital identity comes into the picture. A Gucci brand policeman might have a Bluetooth pen tag reader connected to a mobile. They could then point the pen at a bag and fire off a query: the query would have a digital signature attached (from the SIM or SE) and the Gucci savant could check that signature before processing the query. Gucci could then send a digitally signed and encrypted query to the distributor’s savant which would then send back a digitally signed and encrypted response to be passed back to the brand policeman: ‘No we’ve never heard of this bag’ or ‘We shipped this bag to retailer X on this date’ or ‘We’ve just been queried on this bag in Australia’ or something similar.

The central security issue for brand protection is therefore the protection of (and access to) the provenance data, and this needs a digital identity infrastructure to work properly. If it adds £20 to the price of a Rolex to implement this infrastructure, so what? The kind of people who pay £5,000 for a Rolex wouldn’t hesitate to pay £5,020 for a Rolex that can prove that it is real.

A small brand premium might be rather popular with people who like brands. Imagine the horror of being the host of a dinner party when one of the guests glances at their phone and says “you know those jeans aren’t real Gucci, don’t you?”. Wouldn’t you pay £20 for the satisfaction of knowing that your snooping guest’s Bluetooth pen is steadfastly attesting to all concerned that your Marlboro, Paracetamol and Police sunglasses are all real? Of course you would.

For some goods, we might want to add tamper resistant hardware to the product. I have long been interested in the use of low-cost RFID chips in this context. An example I looked at some years ago was the problem in Korea with the production of counterfeit whiskey. The authentic whiskey producers decided to add an RFID chip to the bottle caps. This chip was coded with a URL and an identifier. When a customer, or a shopkeeper, or a policeman, or in fact anyone else wants to check whether the whiskey is real or not, they touch the cap with their phone and the URL launches a web site that knows the provenance of the identifier and can tell you when and where it was bottled as well as some other information. When a customer opens the bottle, the tag is broken and can no longer be read. That seems to be a cost-effective solution, although it again relies on the provenance database to make it work (otherwise the counterfeiters would just find a way steal the chips).

The mass market IoT, however, amplifier that problem of permission. I have always tried to illustrate this for people in a fun way by using the case study of underwear. It’s one thing for dinner guests to scan my wine bottle to see that it is a real Romanée-Conti and another for them to scan my Rolex to check that it is indeed a first-class far-eastern knock-off, but it’s quite another for them to be able scan my underpants and determine that they date from 1983. How do we turn tags on and off? How do we grant and revoke privileges? How do we allow or deny requests for product or provenance? Once again, we must conclude that not simply digital identity but a full digital infrastructure is needed.

The third approach that I thought worth exploring was that of some form of blockchain. It seemed to me that by using the blockchain to maintain uniqueness, we might find a way to make the IoT a transactional environment. Just as you can’t copy the physical object, but you can transfer it from one owner to another, so you can’t copy a token on a shared ledger, only transfer it from one owner to another. Thus, if you can bind a token to a physical object, you can greatly reduce the cost of managing that object. Hence I was rather interested to read in that Vogue article that Luis Vuitton, Microsoft and Consensus have developed a platform called “Aura” to manage provenance to provide proof of origin and prevent counterfeits using a blockchain. The basic idea is to represent luxury goods as ERC-721 tokens on a private permissioned Quorum blockchain.

Obviously, I don’t have any details about how this will actually work, but LVMH seem to imply that at the time of purchase of one of their brands’ product, the customer can use the brand’s application to receive an “AURA certificate” containing all product information. I assume that if you sell your handbag (or whatever) to a charity shop, you can transfer the certificate to the charity shop’s application. Underlying all of this, there is the token on the blockchain moving from the retailer’s wallet, to your wallet, to the charity shop wallet.

If this works, and it’s simple and convenient for consumers, some sort of app presumably, it will generate an amazing amount of valuable data for brand owners. They will know exactly who has their stuff and how much of it they’ve got. If the app records “fails” as well, then they’ll also know who has the knock-offs too.

 

[Dave Birch] How would you tell a fake Rolex from a real one? I have no idea, since it’s not a position I ever expect to be in. It doesn’t really matter to me, but it clearly does matter to some people. One such group might be people buying Rolex’s on eBay. Fortunately, a German court has come to their aid by demanding that eBay tell real Rolex watches from fakes. Now, it’s clearly a problem to luxury brands that people are selling bent copies on eBay (although, frankly, if someone is flogging a Rolex for £50, you’d think the buyer would know what they are getting). The brands try to sue eBay rather than the actual seller because… actually, I don’t know why but I’m not a lawyer. Anyway a German court has agreed with the brands. Lawyers, eh? I agree with Techdirt: I don’t understand why this is a problem of the market. As they point out, you’ve been able to buy fake Rolexes on the streets of New York City, but Rolex doesn’t sue the New York City government for letting this happen. It recognizes that most people know that the Rolex you buy from a street vendor probably isn’t real and has introduced programs to designate legitimate Rolexes on eBay already — so this seems like the type of “problem” that could work itself out without making eBay liable, but apparently it’s too late for that. But I’m not sure why they care: I can’t afford a Rolex, so if I buy one at a car boot sale or in China, Rolex isn’t losing a sale. But by wearing the fake, I’m presumably advertising the desirability of a Rolex.
 

Technorati Tags: identity

 

There’s a problem in Korea with the production of counterfeit whiskey, so the legitimate whiskey producers have an application in the Korea Telecom service. When the whiskey is bottled, the caps have an RFID tag added to them. This is coded with a URL and an identifier. When a customer, or a shopkeeper, or a policeman, or in fact anyone else wants to check whether the whiskey is real or not, they touch the cap with their phone and the URL launches a web site that knows the provenance of the identifier and can tell you when and where it was bottled as well as some other information. When the customer opens the bottle, the tag is broken and can no longer be read. 

Suppose RFID is used to implement Electronic Product Codes (EPCs) for luxury goods. If I see a Gucci handbag on sale in a shop, I will be able to point my Bluetooth EPC-reading pen (these already exist) at it and read the EPC, which is just a number. My mobile phone can decode the number and then tell me that the handbag is Gucci product 999, serial number 888. This information is, by itself, of little use to me. I could go onto the Gucci-lovers website and find out that product 999 is a particular kind of handbag, but nothing more: I may know that the tag is ‘valid’, but that doesn’t tell much about the bag. For that, I need more data. If I wanted to know if the handbag were real or fake, then I would need to obtain its provenance as well as its product details. The provenance might be distributed quite widely. The retailer’s database would know from which distributor the bag came; the distributor’s database would know from which factory the bag came and Gucci’s database should know all of this. I would need access to these data to get the data I would need to decide whether the bag is real or fake.

But why would the retailer, the distributor or Gucci tell me? How would they know whether I were a retailer, one of their best customers, one of their own ‘brand police’, a counterfeiter (who would love to know which tags are in which shops and so on) or a law enforcement officer with a warrant? This is where digital identity comes into the picture. A Gucci brand policeman might have a Bluetooth pen tag reader connected to a mobile. They could then point the pen at a bag and fire off a query: the query would have a digital signature attached (from the SIM) and the Gucci savant could check that signature before processing the query. Gucci could then send a digitally signed and encrypted query to the distributor’s savant which would then send back a digitally signed and encrypted response to be passed back to the brand policeman: ‘No we’ve never heard of this bag’ or ‘We shipped this bag to retailer X on this date’ or ‘We’ve just been queried on this bag in Australia’ or something similar. The central security issue for brand protection is therefore the protection of (and access to) the provenance data, and this needs a digital identity infrastructure to work properly.

If it adds £20 to the price of a Rolex to implement this infrastructure, so what? The kind of people who pay £5,000 for a Rolex wouldn’t hesitate to pay £5,020 for a Rolex that can prove that it is real. Imagine the horror of being the host of a dinner party when one of the guests glances at their phone and says “you know those jeans aren’t real Gucci, don’t you?”. Wouldn’t you pay £20 for the satisfaction of knowing that your snooping guest’s Bluetooth pen is steadfastly attesting to all concerned that your Marlboro, Paracetamol and Police sunglasses are all real.

 

So if you’re at a boring party and you’re wondering whether the hostesses dress is a real Chanel or a knock-off, you can find out from across the room. Or if you want to snoop around a neighbour’s house but can’t actually be bothered to go into other rooms, it’s ideal. But, as I pointed out some time ago,

Suppose RFID is used to implement Electronic Product Codes (EPCs) for luxury goods. If I see a Gucci handbag on sale in a shop, I will be able to point my Bluetooth EPC-reading pen (these already exist) at it and read the EPC, which is just a number. My mobile phone can decode the number and then tell me that the handbag is Gucci product 999, serial number 888. This information is, by itself, of little use to me

[From Digital Identity: The Rolex premium] 
Indeed. There has to be a database to establish provenance, and it is that database that is at the core of the Korea Telecom business model.

consumer, privacy, rfid
 

The counterfeiters will inevitably shift their attention to attacking the database. If I were a counterfeiter, I’d put chips in my whiskey that linked to a URL that displayed something that looks like the official Korea Telecom page but says “Sorry, the service is currently down, please try again later” or perhaps even “Sorry, the service is down, please call this number for more information” followed by the number for a reverse-charge premium-rate call to Surinam at $199 per minute. Just as with smart posters and so on, unless the chip carries a digital signature, you don’t know whether the URL is real or not, so nothing it directs you to can be trusted. There’s no need for a URL here: just have the chip store a digitally-signed identifier and let the “provenance infrastructure” do the rest. Better still, have the chip store a digitally-signed and encrypted identifier so that only the database owner can decrypt it, ensuring that all provenance request have to go through them.

Without an infrastructure that includes end-to-end digital signatures there’s no way round this. The phone needs to know the chip is authentic. The database needs to know who is asking, and the consumer needs to know who is answering.

 

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The possibility of such a trust dynamic shows that the current discourse of Blockchain replacing trust by means of technology, is too simplistic. At best it will replace some forms of trust by other forms of trust

From Frontiers | Blockchain Applications and Institutional Trust | Blockchain.

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Crime, Coins, Cryptography and the Quantum Future

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There are people who prefer to exist in a cash economy for reasons other than their negative economic analysis of central bank monetary policies or an attachment to the iconography of banknotes. Criminals and corrupt politicians, for example. Cash works rather well for them, but can sometimes be quite inconvenient.

Last year I wrote about two Californian working-from-home pharmaceutical freelancers who were arrested after police caught them dumping nearly $1 million in cash which was intended to buy Mary Jane for business purposes. Dumping a million bucks in notes is time-consuming and inconvenient, which set me thinking.

I can understand why the disconnected, marginalised poor in remote parts of the world eschew the benefits of electronic payments for the currency of choice for the global criminal on the go, the $100 bill. But in California? Don’t they have Bitcoin there? Given the huge hassle of counting, bagging and transporting the Benjamins, why didn’t these wacky baccy impressarios simply buy a few Bitcoins, drive to the drop zones and press the “giddy up” button when the goods were in place!

They stayed analogue. They packed up the greenbacks and set off in their car. It could have been that they’d read that quantum computers will be able to break Bitcoin’s cryptography next year and decided that the trunk of a car was the more secure alternative. The point is they were not interested in friction-free instant dollar dollars. So I must ask the obvious question: if drug dealers won’t use Bitcoin for purchases, who will? How can it be more convenient to cart around great wodges of cash than to zip some magic internet money through the interweb tubes?

It is important to note that Bitcoin is far from being a perfect solution for criminal on the go, though.You will, I’m sure, remember the recent case of the Irish drug dealer who wisely decided to invest in cryptocurrency rather than euros and who amassed a fortune in digital loot. He hid the passwords to the digital wallets holding his ill-gotten gains in his fishing rod.

The drug dealer in question, Mr. Collins, was stopped but the Irish police in the early hours of the morning by chance. Unfortunately for him, he had €2,000-worth of weed in the car and he was arrrested. His properties were searched, and industrial scale cannabis farming was discovered.

He got five years.

Meanwhile, his 12 Bitcoin wallets, containing 6,000 Bitcoin (then worth $50m-ish but now worth $200m-ish) were seized by Ireland’s Criminal Assets Bureau (CAB). Unfortunately the fishing rod with the scribbled passwords had “gone missing” but CAB believes it is “only a matter of time” before computer advances allow them open the digital treasure chest.

Quantumvault

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

Presumably, by “only a matter of time” they mean that they are waiting for the quantum computers to come along a unlock the wallets. They are in good company, because a great many other people (eg, organised crime, unscrupulous “whales” and the tax authorities of many nations) are waiting for them too. Now, code-cracking quantum computers will happen (as I wrote 15 years ago), but they won’t happen tomorrow. Professor John Martinis, who used to be the top scientist in the Google quantum computing team, says that Google’s plan in this field is to build a million-qubit system with sufficiently a low error rate that error correction will be effective. He says that at this point, about a decade away, then the system will have enough logical quits that the system will be able to execute powerful algorithms that attack problems that are beyond the capability of classical supercomputers.

For technical reasons to do with public keys and things, the accountants Deloitte reckon that about four million Bitcoins could be stolen by a quantum computer. With Bitcoin at $30,000 that means a pot of a hundred billion dollars or so is at the end of the quantum rainbow. Well worth spending a few billion to build such a device if you are a criminal, well worth spending tens of billions or even hundreds of billions on such a device when Bitcoin has taken over and has become the need digital gold worth $1m each or whatever. 

It’s a serious threat, and plenty of people have already started work on plans to migrate Bitcoin to more quantum-resistant forms of cryptography (see, for example, “Committing to quantum resistance: a slow defence for Bitcoin against a fast quantum computing attack” from 2018) but these schemes still need access to the old, vulnerable wallets to transfer the cryptocurrency to the new, less vulnerable wallets.

The idea of using quantum technology to make better electronic money is not a new idea, b the way. As the Swedish Central Bank’s recent working paper on Quantum Technology for Economists points out, out the original concept of quantum money (dating back to the early 1980s) exploits “the no-cloning theorem” proven by Wootters and Zurek (1982). This means that it is not possible to clone an unknown quantum state so a counterfeiter with unlimited resources will still not be able to copy a quantum coin, as detailed in this more recent Chinese research paper. Therefore quantum cryptocoins can act more like actual coins (that cannot be double-spent) and that opens up some pretty interesting thinking. As my digital currency technology tree (below) shows, this opens up an interesting third way to pan-galactic digital currency in the future: we can prevent double spending of person-to-person digital cash in hardware (using chips), in software (using blockchains) or in nature (using qubits).

Digital Currency Taxonomy with Quantum

Still, assuming that the Irish police get hold a quantum computer before the Mafia do, there is a tidy amount sitting not only in Mr. Collins wallets (as there is in Mr. Satoshi’s) and the next time the Gardai pull someone over in the middle of the night it will be in a Lambo.

[An edited version of this post appeared on Forbes, 10th January 2020.]

Legal and illegal tender

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China is home to not one but two fascinating experiments in what people have taken to calling “stablecoins”. One of them is the public electronic cash system run by the People’s Bank of China (PBOC), known as the Digital Currency/Electronic Payment (DC/EP) or the digital Yuan. The other is the private electronic cash system run by Hong Kong-based Tether Limited, the cryptocurrency stablecoin known as the Tether. The main use case for the former is currently retail purchases whereas the main use of the latter appears to be market manipulation and money-laundering.

We can learn a lot from studying the dynamics of these to help us to understand how the world of digital currency might develop and whether cryptocurrency might one day become legal tender.

Let’s have a look at illegal tender first. In 2019, USDT surpassed Bitcoin as the most-traded cryptocurrency on the market by volume. This is not, as you might imagine, because consumers prefer to USDT to Visa for ordering a taxi to take mother to church on a Sunday. As reported by Nikkei Asia, USDT is widely used in money laundering, gambling and other illegal activities. China’s Ministry of Public Security has reported that in the first nine months of 2020, police cracked down on 1,700 online gambling platforms and 1,400 underground banks involving more than $153 billion in illegal transactions. Now, not all of this was in Tether, of course. But the number did catch my eye, because I am always interested in use cases for cryptocurrency other the speculation.

Illegaltender

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

Now on to legal tender. Suzhou has long been spearheading trials of DC/EP and in a recent experiment the local municipal government gave away 100,000 digital “red packets”, each containing RMB 200 (around $30) in a lottery, to encourage resident and retailers to try out the electronic cash for themselves. The South China Morning Post reports on the roll-out of the digital Yuan with the example of “shopkeeper Ma” who said that he found the digital currency to be a convenient way to receive and make payments. Not that it matters whether he finds it convenient or not, to be fair, because according to an “operational guidance” document given to the retailers in the pilot programme, they are allowed to decline payment in Alipay or WeChat Pay, but they “cannot decline payment in e-yuan”.

You can see the trajectory. The PBOC published a revised draft of the People’s Bank of China Law in October, laying out the legal foundations for the e-Yuan. The law, in essence, already says that the e-Yuan has the same legal status as the Yuan. Indeed, last year the PBoC issued a formal notice clarifying that cash is legal tender in China and that refusing it is illegal. More recently, it has called for wider acceptance of cash in economic activities and “vowed to punish” those who refuse to accept cash payments. So in China, both the Yuan and e-Yuan will be legal tender and retailers will have to accept both.

Legal Tender

I remember a story about a schoolboy who was refused access to a bus in Wales for trying to pay with a Scottish banknote. The bus company was pressured and apologised, saying that “Scottish currency is legal tender”. Actually, it isn’t. Scottish banknotes are not legal tender in England or, for that matter, Wales any more than Bitcoins or e-Yuan are. Only Bank of England banknotes are legal tender in England and Wales. But there are Sterling banknotes printed by banks in Scotland and in Northern Ireland that are not. Scottish banknotes are not legal tender anywhere, even in Scotland. In fact, Bank of England banknotes are not legal tender in Scotland either, because Scotland has a separate legal system to England and has no legal tender law at all.

This quaint monetary arrangement might seem odd to Americans, but it helps me to make a point. In America as in Britain, legal tender does not mean what you think it means. wrote about this in some detail after someone on Twitter told me that Bitcoin was legal tender in Germany. It isn’t, of course. In fact, Bitcoin isn’t legal tender anywhere and it never will be any more than British Airways frequent flier miles will be (and I’ve bought more cups of coffee with British Airways frequent flier miles than I’ve ever bought with Bitcoin).

Let’s dive in!

Section 31 U.S.C. 5103 on “Legal tender” states that “United States coins and currency [including Federal reserve notes and circulating notes of Federal reserve banks and national banks] are legal tender for all debts, public charges, taxes, and dues”. Here is chapter and verse from The Fed commenting on what that means: “This statute means that all United States money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise”.

So… would a U.S. central bank digital currency (e$, for short) might become legal tender in the future. Here, I think the answer is unequivocal: yes, and in unlimited amounts, because there is no credit risk attached. I predict that a transfer of e$ will be considered legal tender all debts, public charges, taxes and dues. In time, Section 31 U.S.C. 5013 will undoubtedly be extended to say so.

But so what if a digital dollar become legal tender? The physical dollar is legal tender in the U.S. right now and plenty of retailers won't take it. Click To Tweet

There is no federal law that forces people to accept dollars as it is, which is why you see municipalities passing local ordinances to force retailers to accept cash. (These ordinances are, by the way, a bad idea but that’s a story for another day.)

Would the U.S. amend legal tender law to go as far as China and force merchants to accept a CBDC? I doubt it. Would the Fed declare any digital currency that meets regulatory approval to be legal tender and retailers will have to accept both physical dollars and digital dollars? It seems unlikely. Would the US accept CBDC for the payment of tax? Actually, that day might not be so far away, as far I as am concerned what is or isn’t accepted for the payment of taxes is a much better measure of what is or isn’t a currency than outdated concepts of legal tender!

[An edited version of this post appeared on Forbes, 4th January 2020.]

Stablecoins and Soft Power

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The Libra Association has rebranded as the Diem Association and plans to launch its first digital currency, a USD dollar “stablecoin”, early this year so it’s time to think again about the implications of stablecoins. But first of all… here’s wishing you Happy Holidays and all the best for 2021 from all at 15Mb Ltd!

Stable small

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

You’ll remember Libra, the global currency proposed by Facebook. It met with some pretty negative reactions from central banks, regulators and many other stakeholders. Visa, MasterCard and PayPal dropped out of the initial group of Libra Network members and things went a bit quiet. Then the Libra Association produced a revised version of their White Paper, adding “stablecoins” in national currencies to the original plan for a single Libra currency based on a basket of currencies and making an interesting offer from the consortium to the world’s central banks. It says that the consortium hopes that “as central banks develop central bank digital currencies (CBDCs), these CBDCs could be directly integrated with the Libra network, removing the need for Libra Networks to manage the associated Reserves”.

There’s no need to waste resources of your own on CBDC, Diem is telling central bankers. If a couple of billion people around the world are going to store digital currency in Facebook, Instagram and WhatsApp wallets, then why build an alternative? Use us. You set the policies on inclusion and so on, we’ll do the heavy lifting.

You can be the NASA of money, Diem is telling the Fed, and we'll be the Space-X. Click To Tweet

The Bank of England’s December 2020 Financial Stability Report devotes a section to stablecoins and says the bank is considering the potential effects on financial stability if stablecoins were to be adopted widely. It notes that if stablecoins were backed with central bank money in one form or another it would be “economically similar” to a CBDC. A member of the European Central Bank (ECB) board, Fabio Panetta, referred to this issue of at a recent Bundesbank-convened event about the future of payments noting that allowing something like Diem would be “tantamount to outsourcing the provision of central bank money”. But why is that such a bad idea? After all, as Simon Lelieveldt pointed out to me, while we might assume that the ECB would be the issuer of an electronic euro it is not currently in their mandate.

The truth is that stablecoins are coming. Whether provided by private companies or as a public good, the DC/EP cat is out of the bag, the USDC genie is out of the bottle, the Libra horse has bolted and the question for the world’s central banks is not whether there should be digital currencies or not but what is the best way to deliver them. In which context, outsourcing is a viable option. Recall the Mondex experiment of the 1990s: it was the Bank of England that controlled the issuing of the digital currency, but the Mondex system itself and the Mondex cards issued to consumers were provided by commercial banks.

Personally, I can see the attraction of using such an outsourced stablecoin such as Diem. The ability for me to send money to a cousin in Australia by sending a few Facebucks directly from my Facebook Novi wallet to her Instagram Novi wallet would be useful and convenient. The ability for me to buy shareware from a Swedish software developer and pay instantly by transferring Facebucks by WhatsApp would stimulate trade and the economy. Joking aside, with a good user interface, a good customer experience and a good API to satisfy regulators, Novi and Diem together could indeed provide a viable global alternative to SWIFT.

Dollars and Dominance

Perhaps more importantly, though, US dollar stablecoins — whether provided by central banks themselves as in China, by banks or mobile operators, or by other organisations such as the Diem Assocation — would also reinforce the global dominance of the US dollar ahead of digital competitors (including everyone’s favourite unstablecoin, Bitcoin) in the post-pandemic world where online transactions are the new normal.

The German Minister of Finance calls Diem “a wolf in sheep’s clothing”. If you look at it though, what Diem propose to do is basically that same as is already allowed under European electronic money regulation. Provided that Diem segregate the customer deposits and hold them in the form of bank deposits and other appropriate asset classes, then issuing a digital dollar (or euro or or pound) is no big deal. What the Minister and others are presumably concerned about is the loss of monetary sovereignty if European citizens opt to shift their cash holdings from euros to dollars whether intermediated by Diem, Circle or anyone else.

If you want to understand some of the bigger picture around currencies, competition and what the eminent historian and Hoover Institution senior fellow Niall Ferguson refers to as “Cold War 2”, then you should take the time to listen to this conversation between Ferguson and CoinDesk’s Michael Casey. As the author of one of the best books on the history of finance, The Ascent of Money, Ferguson has a very wide and well-informed perspective on the issues and I have quoted him more than once in my book on the topic.

In this conversation, Ferguson observes that one of the lessons of history is that with globalisation comes a tendency for a particular currency to become the dominant currency, the Prime Currency, for transactions for trade. In the 19th century it was the British Pound, in the 20th century it became the US Dollar, and in the 21st century it will be… well, who knows but as globalisation moves into a period of obvious crisis it is being talked about as it wasn’t before. Ruchir Sharma, Morgan Stanley Investment Management’s chief global strategist, recently wrote in the Financial Times that only five currencies had been top dog in post-medieval times: those of Portugal, Spain, the Netherlands, France and our United Kingdom. Those reigns lasted 94 years on average, by which measure the Dollar is overdue for overthrow.

Public or Private? Local or Global?

Many people think that the only thing keeping the Dollar in place is the lack of a successor. Ferguson points toward China as the place where the new world may be forged, saying that “if I’m right and that trend continues and they become more dominant in not just domestic consumer payments in China but increasingly in payments around the world” then we may start to see a shift in the “tectonic plates of the international monetary system” and I couldn’t agree more.

Ferguson also refers to former Bank of England governor Mark Carney’s call for a synthetic hegemonic currency (SHC), which he rates as more plausible than Diem as the future of the international financial system. It would be a victory for John Maynard Keynes from beyond the grave. Keynes, as you will recall, was in favour of an SHC (the “bancor”) from the very beginning of the current international monetary regime and (correctly) reasoned at the time of Bretton Woods that the lack of such an international reserve currency would deliver control to the United States (at the expense of the United Kingdom).

In Ed Conway’s excellent book on Bretton Woods “The Summit” he talks about how the dollar becoming top dog gave America what the recently-deceased former French President Valery Giscard d’Estaing called the “exorbitant privilege” of borrowing in its own currency. But finance is not the only reason why the coming currency Cold War is of vital importance to the US (and to the West as whole) and control over currency is important.

Currency competition is about politics, because the use of the dollar to settle global transactions gives the US unparalleled lever of “soft power”. As Ferguson puts it, “I think we probably mostly underestimate how extraordinarily effective this lever has been, it’s actually been a much more effective weapon of US foreign policy than the boots on the ground of the U.S. Army and Marine Corps”. Hence a digital dollar (whether a NASA Digital Dollar or a Space-X Facebuck) should be an important policy discussion in the United States right now. Should a future US administration with a global perspective accept the compromise of an SHC as a means to retain some control or can they launch a digital dollar into global orbit first?

[An edited version of this piece first appeared on Forbes, 14th December 2020.]

Show me the money

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In the UK, a committee of MPs has said that the Bank of England should be trying to track down £50bn of “missing” UK currency. This is about three-quarters of all UK banknotes in existence! So where is all of the missing cash? Is it all being used by money launderers or people bribing government officials to obtains COVID-related contracts or are there more benign explanations?

Cashgone

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

It’s not only the UK that has lost track of its cash. In a many countries, for many years, the use of cash for purposes such as shopping has been steadily decreasing while the amount of cash “in circulation” has been steadily increasing. This is true in, for example, America and Australia as well as in the UK and Europe.

Down Plunder

Look at Australia as an example. The governor of the Reserve Bank of Australia (RBA), Philip Lowe, pointed out that “there are fourteen $100 notes in issue for every Australian, thirty $50s and seven $20s” before going on to ask where exactly the $3,000 per Aussie is, saying that “I, for one, don’t have anywhere near that amount”. Me neither, although I just checked and I do have A$25 in my travel wallet, so perhaps one explanation is that lots of visitors get some Aussie dollars out at the airport and then discover that they never need them because it’s an advanced nation where everywhere takes contactless and then forget to spend them before they leave. But that can’t account for anything but a tiny fraction of the billions “in circulation”.

IMG 2600

The main explanation given by the RBA is that some people choose to hold a share of their wealth in Australian banknotes. The RBA Research Discussion Paper 2018-12 “Where’s the Money‽” says that of the outstanding banknotes some 15–35 per cent are used to facilitate legitimate transactions (I’d actually be surprised if it was ten per cent by now) with the rest hoarded as a store of wealth or for other purposes. These other purposes are:

  • 10–20 percentage points to domestic hoarding (this now seems small to me, given the lack of transactional usage and the ban on cash transactions over $10,000) and up to 15 percentage points to international hoarding (which includes the A$25 in the draw in my study);
  • 4–8 per cent are used in the shadow economy. This seems low, given that more recent figures show that up to A$1 billion is held by drug dealers alone at any one time, and
  • and 5–10 per cent are lost.

Some good news for the RBA is that some of the missing banknotes turned up. A Mr. Simon Cross was pulled over in Queensland and when the police looked in his car they found $4.35 million in cash ($1.75 million in a suitcase and $2.61 million in a cardboard box). I don’t doubt, by the way, that Mr. Cross’ preference for cardboard boxes full of cash is legitimate and a wholly reasonable response to the low interest rates currently available on Australian savings accounts.

My point is that whether in the America or the United Kingdom or Australia, the use of cash for legitimate activities has been falling while the use of cash for drug dealing, money laundering, tax evasion, payments to corrupt officials and so on has been rising. Banknotes are, statistically, not being used to buy anything.

Cash is no longer primarily a means of exchange. Click To Tweet

The latest figures from the Bundesbank show that nine out of every ten euro banknotes issued in Germany are never used in payments but hoarded at home and abroad as a store of value. Not “rarely used”. Not “infrequently used”. Never used. The notes are not in circulation at all but are stuffed under mattresses where they are not even part of the shadow economy.

Cash Categorised

A few years ago I wrote about the Bank of England’s four-way categorisation of the demand for and I thought it might be interesting to integrate the RBAs research into this to help the committee of MPs to formulate policy. So let’s standardise on the categories of cash use and discuss them:

  1. Transactions. Here the trends are clear. Technology is a driver for change but that the impact is weak. In other words, new technology does reduce the amount of cash in circulation, but actually quite slowly (although the pandemic has accelerated the rate of decline throughout this year, of course).
  2. Hoards. These are stores of money legally acquired but held outside of the banking system. If the amount of cash that is being hoarded has been growing then that would tend to indicate that people have lost confidence in formal financial services or are happy to have loss, theft and inflation eat away their store of value while forgoing the safety and security of bank deposits irrespective of the value of the interest paid.
  3. Stashes. These are stores of money illegally acquired or held outside the banking system to facilitate criminal behaviour. My personal feeling is that in most countries stashes have grown at the expense of hoards.

    Prof. Charles Goodhart (London School of Economics) and Jonathan Ashworth (UK economist at Morgan Stanley), note that the ratio of currency to GDP in the UK has been rising and argue that the rapid growth in the shadow economy has been a key cause. Two rather obvious factors they highlight are the increase in VAT to 20% and the continuing rise in self-employment, both of which serve to reinforce the contribution of cash to the shadow economy.

  4. Exports. The amount of cash that is being exported is hard to calculate, although the Bank itself does comment that the £50 note is “primarily demanded by foreign exchange wholesalers abroad”. I suppose some of this may be transactional use for tourists and business people coming to the UK, and I suppose some of it may be hoarded, but surely the strong suspicion must be that at lot of these notes are going into stashes.

As you see, I distinguish between hoards and stashes. I have a strong suspicion that cash (in particular those $100 bills that the governor refers to) is a major component of stashes. In which case, the fate of the UK’s missing billions in £50 notes is not particularly mysterious. A couple of years ago, the UK Treasury said that these notes are “rarely used” for routine transactions and that there is a “perception” that they are used for money laundering, hidden economy activity, and tax evasion. This perception is pretty widespread, by the way, and not only amongst itinerant bloggers and crypto commentators . I remember when Peter Sands, the former head of Standard Chartered, said that the main use of the £50 was illicit and he’s about as much of a mainstream banker as you can get. In summary, therefore, I think think that central banks estimates of hoarding are generous and that it is the shadow economy fuelling the growth in cash “in circulation”.

The Gap

If the amount of cash being stashed has indeed been growing then central banks are facilitating an increasing tax gap that the rest of us are having to pay for. This why, given that no-one is using them for legitimate purposes, I thought it was odd when the Bank of England decided bring the £50 up to date and make it out of plastic. Robert Jenrick, then exchequer secretary to the Treasury, explained the decision at the time by saying that “people should have as much choice as possible when it comes to their money and we’re making sure that cash is here to stay”. Maybe the government was worried that tax evaders are an electoral force to be reckoned with. According to British tax authority estimates (see below) almost half of the tax gap is down to small businesses and they account for nearly three times as much of the missing tax as “criminals”. I’m not sure if all of these groups are voters, but they must in some measure account for the government’s reluctance to inconvenience those responsible for the lion’s share of missing taxes.

UK Tax Gap Customers 2017 Picture

Why do I keep going on about this? It’s because the people who benefit from the convenience of £50 notes (eg, tradesmen avoiding sales tax, crystal meth manufacturers avoiding social security taxes and so on) are benefitting at the expense of law-abiding tax-paying citizens (eg, me) and I have to fill in my tax form soon.

[An edited version of this post first appeared on Forbes, 7th December 2020.]

China and America both need new fintech regulation

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In a recent episode of Professor Scott Galloway’s podcast, he talked with one of my favourite writers: the eminent historian and Hoover Institution senior fellow Niall Ferguson. The subject of the conversation was the relationship between the United States and China. Their fascinating and informative discussion ranged across many fields, including financial services and fintech. Ferguson touched on a particular aspect of what he calls “Cold War 2” in context of finance, saying that American regulators “have allowed the fintech revolution to happen everywhere else” by which I think he meant that the nature of financial regulation in America has been to preserve the status quo and allow the promulgation of entrenched interests while the costs of financial intermediation have not be reduced by competition. He went on to say that “China has established an important lead in, for example, payments”, clearly referring to the dominance of mobile payments in China and the role of (in particular) Alipay in bringing financial services. He made this comment around the same time that the Chinese government pulled the plug on the Alipay IPO, what would have been the biggest IPO in history.

Weareno1

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

As an aside, if you want to understand some of the big picture around the coronavirus, currency (and what I call “The Currency Cold War” in my book of the same name), then you might want listen to this Coindesk podcast with Ferguson and the journalist and author Michael Casey. They talk about the current state of the world and what it could mean for money. As the author of one of the best books on the history of finance, The Ascent of Money, Ferguson has a very wide and well-informed perspective on the issues and, indeed I quote him more than once in my book!

At a time when America is finally beginning to at least think about opening up financial services to allow real competition, China is heading in the opposite direction by clamping down on fintechs. Click To Tweet

Ferguson’s point about payments is particularly interesting to me. One way to provide more fintech competition to the incumbents would be to provide a more relaxed environment for payments. America lacks a regulatory construct equivalent to the EU’s “Payment Institution” and it really needs one if it is to move forward. The EU regulatory framework has just been battle-tested with the collapse of Wirecard following massive fraud. No customer funds were lost in the collapse of the badly-regulated non-bank because the customer funds were ring fenced in well-regulated bank and, as I will suggest later, this might be the right regulatory balance for new US regulation.

One place to look for this new regulation might be the OCC, which has developed the concept of the Special Purpose National Bank (SPNB) charter. I don’t want to sidetrack into the controversy around these charters, except to note that the OCC expects a fintech company with such a charter to comply with capital and other requirements that seem unlikely to generate the innovation and competition that America wants. This was obvious from the comments on the original proposals, when fintechs made it clear they would be reluctant to invest in such an OCC license unless such a licence would require the Federal Reserve to give them access to the payments system (so they will not have to depend on banks to intermediate and route money for them). The fees associated with such intermediation are significant (ie, top five) operating cost for many fintechs.

I agree wholehearted with Prof. Dan Lawry of Cornell Law School, Lev Menard of Columbia Law School and James McAndrews of Wharton Financial Institutions Center who in their response to the OCC’s proposal labelled it “fundamentally flawed” and called for the organisation to instead look at strengthening the regime for non-bank financial institutions. The focus on banking regulation, though, seems entrenched. I notice that Congresswoman Rashida Tlaib (MI-13), along with Congressmen Jesús “Chuy” García (IL-04) and Chairman of Task Force on Financial Technology Rep. Stephen Lynch (MA-08), have just introduced the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, which similarly propagates this outdated (and inappropriate) regulatory perspective by requiring any prospective issuer of a “stablecoin” (let’s not even get into what is or is not a stablecoin) to obtain a banking charter.

There is an alternative. The idea of another kind of federal charter that would allow regulated institutions access to payment systems, but would not allow them to provide credit, seems much more appealing for not only stablecoin issuers but almost all other fintechs as well. Such a charter would separate the systemically risky provision of credit from the less risky provision of payment services, a very different concept to the SPNB charter. The economist George Selgin, Senior Fellow and Director of the Cato Institute’s Center for Monetary and Financial Alternatives, recently posted a similar point on Twitter, arguing for the Federal Reserve to give fintechs direct access to payment systems (instead of having to go through banks). This was the approach taken in the UK when the Bank of England decided to give settlement accounts to fintechs, where examples of fintechs who took advantage of this opportunity to deliver a better and cheaper service to customers range from the $5 billion+ Transferwise money transfer business to the open banking startup Modulr (which just recieved a $9 million investment from PayPal Ventures). Interestingly, Singapore has just announced that it will go this way as well, so that non-banks that are licenced as payment institutions will be allowed access to the instant payment infrastructure from February 2021.

My good friend Chris Skinner was right to say that many US fintechs will follow the likes of Varo, apply for new licenses and become more and more like traditional banks, but that’s because the traditional bank licence is all that is on offer to them. But this is an accident of history that jumbles together money creation, deposit taking and payments. It’s time to disentangle them and to stop, as Jack Ma (the billionaire behind Alibaba and Ant Group) recently said, regulating airports the way we regulate train stations. He said this was shortly before Chinese regulators halted Mr. Ma’s IPO, following his comments  questioning financial regulation, clearly signalling that their relaxed attitude toward the growth of China’s financial giants is coming to an end.

The Chinese regulatory environment is changing. Whereas China was happy to see its techfins grow in order to help them scale while American enterprises were kept at bay, it is now beginning to rein them in. The new players are now having to build up capital and review business structures as those regulators focus on issues such as data privacy, banking partnerships and lending. With respect to that latter point, note that the concerns around the Alipay IPO were related to lending and leverage, not payments. Although heading towards half of Ant’s revenues came from the lending, facilitated by their vast quantities of data, but they only came up with 2% themselves (if they were were a bank, they would be required to provide something like a third) passing the rest of the exposure onto banks.

Meanwhile, in September, the European Commission (EC) adopted an expansive new “Digital Finance Package” to improve the competitiveness of the fintech sector while ensuring financial stability. The proposed framework includes a legislative approach to the general issue of crypto-assets, called Markets in Crypto-assets (MiCA). I’ll spare you the whole 168 pages, but note that it introduces the concept of crypto-asset service providers (CASPs) and defines stablecoins as being either “asset-referenced tokens” that refer to money, commodities or crypto-assets (although how this can be called “stable”, I am not at all clear) or “e-money tokens” that refer to one single fiat currency only.  E-money tokens (eg, Diem) are a good way to bring innovation to financial services because they are a way to bring genuine competition.

I think the EU may be charting a reasonable course here. China needs to regulate lending more, the US needs to regulate payments less. America needs more competition in the core of financial services and now is a good time to start. With the Biden administration on the way, they can tackle this core issue that, as The Hill says, the U.S. government has “ignored and neglected” the need for a regulatory framework that will support American technological innovation around cryptocurrency, setting aside an embarrassing and “outdated regulatory approach to fintech”. Prof. Lawry suggest a simple and practical response for the US regulators, which is to amend the state-level regulatory frameworks around money services businesses (MSBs), which they say “are the product of a bygone age”, and learn from M-PESA and Alipay where a 100% reserve requirement seems to have proved very successful. There is no evidence that such a requirement stifles growth. Congress need only introduce a uniform requirement that MSB hold a 100% in insured deposits at a bank that holds account balances at the Federal Reserve, which is in essence the same as an EU Electronic Money License and therefore ought to lead to mutual acceptance.

In short, China needs tighter regulation of non-bank credit, America needs lighter regulation of non-bank payments. The way forward is to separate the regulation of payments from the regulation of credit from the regulation of investments. This is the way to get competition and innovation in financial services.

May I interest you in a credit card *bleep*

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In August this year, eight teams gathered for the three-day final of DARPA’s AlphaDogfight trials. The teams had developed Artificial Intelligence (AI) pilots to control F-16 fighter aircraft in simulated dogfights. The winner beat the human USAF pilot in five dogfights out of five. I’m not really sure what this means for the defence of the free world, partly because I don’t know anything about air combat (other than endless games of Falcon on my iMac years ago) but largely because it seems to me that there is a context error in the framing of the problem. Surely the future of air warfare isn’t robo-Maverick dogfighting with North Korea’s top fighter ace but $100m Tempest fighters (which as Sebastian Robin pointed out in Forbes earlier this year, might make more sense as unmanned vehicles) trying to evade $1m AI-controlled intelligent drones and machine-learning (ML) swarms of $10,000 flying grenades that can accelerate and turn ten times quicker. The point about budget is important, by they way. Inexpensive Turkish drones have been observed in Syria and Libya destroying enemy armour that costs ten times as much.

As is often said then, we plan for the battles of the next war using the weapons of the last one. This is true in finance just as it is in defence. A couple of years ago, John Cryan (then CEO of Deutsche Bank) said that that the bank was going to shift from employing people to act like robots to employing robots to act like people. They put this plan in motion and earlier this year announced big staff reductions as part of a radical overhaul of operations. At the same time, the bank announced that it will spend €13bn on new technology over the next four years. These investments in infrastructure “are already making some humans at Deutsche unnecessary”. The bot takeover in banking is already happening.

It is not surprising to see this takeover happening so quickly, because there are many jobs in banks that are far simpler to automate than that of a fighter pilot. In India, YES Bank has a WhatsApp banking service that uses a chatbot (a conversational AI with extensive financial knowledge) to help customers to check balances, order cheque books, report unauthorised transactions, redeem reward points, connect with help desks and to apply for more than 60 banking products. And this is only the beginning. The Financial Brand reported on research from MIT Sloan Management Review and the Boston Consulting Group showing that only one in ten companies that deploy AI actually obtain much of a return on ROI. This is, as I understand it, because while bots are good at learning from people, people are not yet good at learning from bots. A robot bank clerk is like a robot fighter pilot, an artificial intelligence placed in the same environment as a human: when organisations are redesigned around the bots, then the ROI will accelerate.

Maverick

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

The robots will take over, in banking just as in manufacturing. So will you be served by a machine when you go to the bank five years from now? Of course not. That would be ridiculous. For one thing, you won’t be going to a bank five years from now under any circumstances. You’ll be explaining “going to” a bank to your baffled offspring just as you were explaining “dialling” a phone to them five years ago. But you won’t be going to your bank in cyberspace either. Your bot will. As I pointed out in Wired this time last year, the big change in financial services will come not when banks are using AI, but when customers are.

The big change in financial services will come not when banks are using AI, but when customers are. Click To Tweet

Think about it. Under current regulations, my bank is required to ask me to make decisions about investments while I am the least qualified entity in the loop. The bank knows more than I do, my financial advisor knows more than I do, the pension fund knows more than I do, the tax authorities know more than I do. Asking me to make a decision in these circumstances seems crazy. Much better for me to choose an approved and regulated bot to take care of this kind of thing. And if you are concerned that they may be legal issues around delegating these kinds of decisions to a bot, take a look at Ryan Abbott’s argument in MIT Technology Review that there should be a principle of AI legal neutrality asserting that the law should tend not to discriminate between AI and human behaviour. Sooner or later we will come to regard allowing people to make decisions about their financial health as dumb as letting people drive themselves around when bots are much safer drivers.

The battle for future customers will take place in landscape across which their bots will roam to negotiate with their counterparts – ie, other bots at regulated financial institutions – to obtain the best possible product for their “owners”. In this battle, the key question for customers will become a question of which bot they want to work with, not which bank. Consumers will choose bots whose moral and ethical frameworks are congruent with theirs. I might choose the AARP Automaton, you might choose the Buffett Bot or the Megatron Musk. Once customers have chosen their bots, then why would they risk making suboptimal choices around their financial health by interfering in the artificial brain’s decisions?

Imaging the world of the future as super-intelligent robots serving mass-customised credit cards and bank accounts to human customers is missing the point — just as imagining the world of the future as F-16s with robot pilots duelling M-29s with robot pilots is — because in the future the customers will be super-intelligent robots too.

[An edited version of this article first appeared on Forbes on 24th November 2020.]

Five Red Flags From Inside Wirecard

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Wirecard has gone down as one of the biggest corporate frauds in history. The German fintech “unicorn” (I hate this word, because Wirecard was actually real, while unicorns are not merely rare, they are mythical) that was once worth nearly $30 billion went bust after a $2 billion hole in its accounts that had been missed by the auditors was finally uncovered.

Bettermyth

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

The CEO is under arrest and the COO (the mysterious Jan Marsalek) is nowhere to be found apart from on Interpol’s “most wanted” list. Pretty scandalous and clearly evidence of systemic failure in regulation and auditing. But I couldn’t help thinking to myself “hey, I know people who worked for Wirecard, and they were intelligent people” and then I began to ruminate on the issue of “how was it that they didn’t know what was going on”? Then I started to speculate “if I was in their place, would I have noticed”? And then, most importantly, I started to wonder what the people I know could share so that we don’t get fooled again.

Strategy and Stealth

In companies that grow quickly, through acquisition rather than organic growth, it is often the case that the corporate structure is a fossil history of the evolution of the corporate beast. In a good company, the corporate hierarchy and holding structure will be periodically re-organised to reflect the functions, the geographies or the services of the business. Wirecard was organised by entity, and there were far too many of them. A culture of confidentiality meant that there was no transparency across entities or indeed within many of them.

Within this fossilised structure, there was a “need to know” mindset more more suited to the production of Patriot missiles than the issuing of payment cards. Personally, I think “need to know” is a huge red flag of all and its one of the aspects of the company that Laura and others were surprised by when they first came into the business. As she said to me, executives simply cannot function without an ability to “connect the dots” between business and strategy.

Earnings and Ethics

Everyone from the board to BaFin was focused on the impressive (but as it turned out, imaginary) earnings and the CEO’s growth predictions. But ethics can’t always take a back seat to earnings and corporate boards should remember that they have a role in making sure the fundamentals of a business are in place and those fundamentals are not simply number. It’s a red flag when a board doesn’t demand integrity in processes and procedures.

Management and Metrics

Wirecard management was wholly focused on outputs and there was no attention to inputs. This was a symptom of a more general problem of a lack of process, ethical or otherwise, that pervaded the organisation. With no internal platforms for ERP or CRM, reporting was based on the exchange of spreadsheets and scribbled notes. With no attention paid to due diligence or deal structure in the sales pipeline, with no measurement of reporting on customer satisfaction and retention and with no clarity on how the performance of individual units was related to overall corporate strategy even senior and experienced managers were in the dark on business performance. That’s another red flag right there.

People and Positions

Organisational hierarchy should locate roles that are needed to execute the corporate strategy but a number of people have told me that in Wirecard the organisational hierarchy was built around individuals and personal relationships and loyalties. This is never healthy in the long run. First of all it makes it very difficult to attach a balanced scorecard to any of the roles so that performance can be assessed and employees can be supported. Secondly it means that the organisational hierarchy is often suboptimal and not able to support the business in meeting its goals.

Loyalty is of course important, but it is only more important than corporate structure in the Mafia. Well-run companies deal with this problem to a great extent by balancing internal promotion with external hiring so that roles have a mix of new and old blood, crosschecking and different ideas, bringing in a fresh pair of eyes here and there to challenge existing mental models and stop groupthink in its tracks. Wirecard had too may senior management positions filled by long time employees, and that’s a red flag in a business that wants to mature.

Mission and Meaning

There were no corporate goals other than sales targets and those are not a mission statement nor are they values.  Insofar as the company did have a high-level strategy it was aspirational rather than actionable and left even senior employees wondering about their purpose and direction. Another friend I spoke to was Karl Mohan, who was Wirecard’s General Manager for Australia and New Zealand. He used the word “gobbledegook” and I think that’s an accurate description of management goals that are not based on realistic corporate strategy. In order to create a long-term, sustainable corporate culture you need to have a strategy but you also need to have values that are clear and understandable to all stakeholders. Laura told me that in Amazon, for example, there are 14 corporate values that are part of the employees’ everyday vernacular and they really do drive the right behaviour and the right results.

A lot of this comes down to having the right kind of leadership for organisations in different stages of growth. This is hardly a secret and there are thousands of business books about this. There are many aspects to good leadership and many great leaders we can all learn from. Frankly, I’m no expert on leadership but I do know that a CEO’s manic obsession with share price is not a sign of good leadership but a form of obsessive-compulsive disorder (the same as you often see in people who hold Bitcoin) and a definite red flag.

Won’t Get Fooled Again

What should you take away from this sorry tale of corporate collapse? Don’t imagine that you are so smart that you would not have been fooled by the Wirecard CEO’s shenanigans! Most people you work with aren’t crooks, even in investment banks, so you have will have had little experience of dealing with fraudsters. Therefore when you see bad practice, you tend to ascribe it either to management incompetence in established companies or youthful excess in startups. But you might want to keep these red flags in mind when you next see a management memo that doesn’t make sense, a strategy deck which is only sales targets or a reporting system made from spreadsheets and Post-Its. They might be indicators of the kind of run-of-the-mill managerial incompetence that we are all familiar with, but… they might not.

[This is an edited version of a piece that first appeared on Forbes.com, 17th November 2020.]

From Location to Microlocation

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I loved the 2014 book “You Are Here” by Hiawatha Bray of The Boston Globe. It tells the history of location and navigation technologies and explains just what a huge change in human affairs it was when suddenly you could always know where you were and how to get where you want to be. We take it for granted today, but GPS and Google Maps are pretty astonishing. My children have absolutely no idea what it would mean to be lost. There’s no such concept in a smartphone world where cars will soon be able to drive themselves home and your Bluetooth can tell you which office you are in and how to get to the coffee room.

Well, another big change in location is coming. Consumers will soon see a whole new range of services that are impossible to deliver using existing location technologies such s GPS or Bluetooth and these will in turn create incredible new opportunities for financial services. It hasn’t got as much attention as 5G but since the iPhone 11, Apple’s phones (and the series 6 Apple Watch and the new HomePod) have come with a technology called Ultra Wideband, or UWB. As does the new Samsung Galaxy Note 20. UWB heralds a new battle between the internet giants: the battle over micro-location (or µlocation, if you will).

Knowing where you are has changed the world. Knowing where everything is will change it again. Not only will you never get lost again, you’ll never lose any of your stuff again.

First of all, it’s important to understand that UWB is not really a new technology. The IEEE (Institute of Electrical and Electronic Engineers) standard on UWB (802.15.4) came out more than a decade ago. It was one of a family of wireless protocols (along with Bluetooth, ZigBee and WiFi) that were intended for short-range wireless communications with low power consumption. At the time it was assumed that, broadly speaking, Bluetooth was for a cordless keyboards and hands-free headsets, ZigBee was for monitoring and control networks, while Wi-Fi was for computer-to-computer connections to substitute for wired networks and UWB was for high-bandwidth multimedia links. It never really caught on though. WiFi worked well enough and it got faster pretty quickly.

So there was a pivot.

Engineers found another use for UWB, because the radio pulses that it uses have a very interesting characteristic which is that they allow you to determine location very accurately indeed. Much more accurately than you get from signal strength estimation (as with Bluetooth proximity applications). This means that with UWB it is possible to measure distance to a couple of inches and since apps can get this information a few times every second they can also tell whether another device is stationary, approaching or receding. For example, a UWB-enabled system can sense if you’re moving toward a locked door and it can know if you’re on the inside or outside of the doorway, to determine if the lock should remain closed or open when you reach a certain point.

Finding things is only the beginning, although it is by itself a huge market. Take tags. If you have a UWB phone and a UWB tag of some kind, the phone can work out exactly where the tag is. I’m a big fan of this kind of application because I’m old and forget everything and adore my Tile app! If you haven’t used Tile, it’s an app on your phone that can locate Bluetooth tags. You buy these tags and then attach them to things (I’ve got one on my keys, one in my wallet, one on my TV remote and one in my notebook) so that you can find them easily. I can’t tell you how many times I’ve misplaced my keys and saved hours of searching around the house by using the app.

Socks

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

A recent Apple patent application sets out how a system of “Airbags” might work. Suppose you have one of these tags in your notebook and you leave your notebook somewhere. When the notebook loses touch with your iPhone because you have walked away, the tag goes into a “lost mode” and transmits its encrypted details through any other device it happens to come into contact with. So a stranger with an iPhone walks past, the tag sends its position and that stranger’s iPhone passes the message on via Apple to your iPhone. So when you realise you can’t find your notebook, your iPhone can tell you exactly where it is. The idea that you can lose something will fade from memory. Just as the 4G generation cannot imagine being lost because their phone can always tell them where they are, so the UWB generation will not be able to imagine losing anything, because their phone will always be able to tell them where if they left their wallet in a store, if the TV remove control is still in the family room and if their stash has been moved from their secret place in the tree near the park.

A more mainstream use case (where Apple already has patents) is for keyless car unlocking. Apple is a charter member of the Car Connectivity Consortium, which created the Digital Key Release 1.0 specification in 2018, and I’m sure that this sort of thing is only the beginning. Who knows what applications inventive developers will come up with when they have the ability to determine location to this kind of accuracy. Look at the issues that have arisen with using Bluetooth approximations in the Apple/Google contact tracing services.

New Competition

UWB chips are already used for some amazing applications such as tracking players (and the ball) on a sport field or for finding equipment in hospitals, but now that they are arriving in consumer devices there is going to be an explosion of creativity from those COVID contact tracing services (much better with µlocation than with Bluetooth) to contact-free commuting (where the train knows where you got on and got off). Knowing where you are, and where your stuff is, to an inch instead of 30 feet opens up new possibilities which is a variety why industry analysts estimate that this market will grown around 20% per annum, hitting at least $50 billion in the five year.

So why am I thinking about this stuff now? Well, it’s because it has started to make inroads into the world of payments. In Japan, NTT Docomo has teamed up with Sony and NXP Semiconductors (their UWB chipset was announced last September) to trial technology that lets shoppers make NFC payments without having to take their phones out of their pockets. They are using UWB to follow user movement and positioning with location accuracy of a few centimetres. This takes the new location technologies into the transaction space, alongside the existing Wifi, RFID/NFC and Bluetoon technologies. Obviously this of particular interest to me because of the applications around payments, insurance and risk management but I’m sure there are kids in basements rights now working on applications that I’ve never thought.

It seems to me that location is going to be central to some pretty important battles in the consumer technology space. Wired magazine summed up one of these battles very well last year, noting that Amazon (whose Sidewalk meshes low-cost, low-bandwidth sensors and smart devices) and Apple have embarked on missions to extend their control of their customers’ devices so that “Apple can get out of the home and Amazon can get into it”.

Knowing where you are and where your stuff is begins to erode fuzzy boundaries between mundane and virtual and creates a new border zone where competition will spur a generation of innovation. Oh, wait… where did I leave my AirPods…

[This is an edited version of an article that first appeared on Forbes, 12th November 2020.]