The new payment systems regulator is tasked with increasing innovation. This means increasing competition, which means reducing barriers to entry.

There was a good article back in the September “Financial World” magazine arguing that transparency is a key to regaining confidence in the banking system. I agree strongly, and I’m not the only one.

More transparent record keeping would allow law enforcement to trace the transfer of funds and identify those responsible for the illicit use or theft of virtual currency.

[From Virtual Currencies, Real Theft - Javelin Strategy & Research Blog]

Indeed it would, and some might argue that that transparency be extended to legacy infrastructure as well. (It’s not really the topic of this post but remember than transparency need not subvert privacy. You could have pseudonymous dark pools but force the release of linked identities given a warrant, for example.) If, however, transparency is taken to mean thorough KYC/AML/ATF procedures (henceforth known as CDD, or customer due diligence) that identify all participants to a transaction to all observers, then it will force criminals, terrorists and corrupt politicians to abandon electronic means of exchange and go back to cash. If that happens, then we are all worse off. Having some traceability is better than having none at all, as I’ve argued before. And it’s not as if having rigorous CDD solves the problem.

Worse still, the increased cost associated with a tougher stance on KYC does nothing to make the system any more secure, and may in fact drive up risk rather than reduce it.

[From Cost of KYC too high says Swiss start up » Banking Technology]

I suppose you could argue that what is driving the players at the moment is not risk but liability. So long as they can shift the liability onto someone else, no-one really cares who you are. The system is broken.

The two set up 68 accounts in 19 different cities using 24 aliases to handle the transfer of funds and sent the bulk of the money to individuals in Nigeria, who set up the operation. Money was also wired to addresses in the UK, Ecuador, India, the United Arab Emirates, and the US, none of which has been recovered.

[From Mother/daughter team jailed for million-dollar internet dating scam • The Register]

Hold on. 68 accounts using 24 aliases? What was the point of the billions of dollars spent on KYC, AML and ATF? And why am I going on about this anyway? Well, in her keynote at Payments Innovation 2014, Mary Starks (the acting MD for the UK’s new Payment System Regulator) said that on the whole regulators “don’t do innovation”. I was on the panel with her, so I made what I think was a reasonable point that the best regulatory approach to innovation is competition, and that a focus on reducing the barriers to entry to payments markets that do not involve systemic risk is probably sufficient. We don’t need to imagine what people might come up with, we just want to make it easy for them to do so.

When it came to the discussion that followed, I used CDD as an example of such a barrier. The costs and complexity of CDD can make it very difficult for new entrants, especially those dealing with low-value payments, the excluded and specialist niches to get off the ground. One of the reasons for this is that there is no infrastructure for them to plug in to, so everyone has to build everything from scratch.

Surely all of this dialogue about passports and utility bills, declarations and signatories and KYC and AML is pushing a demand for a new digital infrastructure to cure all of this mess.

[From Digital identities demand a digital infrastructure | Banking View]

Karen Wendel from Identrust talked about the infrastructural approach in her presentation as well, and this all links to the discussions about the idea of a financial service passport (or a “pay name”) at techUK last year. I really think that the idea of pseudonymous, strongly-authenticated CDD identities is an idea whose time has come. I should be able to participate in a transaction as John Doe, provided that I can prove that someone (e.g., my bank) knows who John Doe actually is. You don’t need to know who I am to do business with me, so long as you know that _someone_ knows who I am.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

The post Payment system regulation as barrier to payment system innovation appeared first on Tomorrow's Transactions.

There are people trapped in the cash economy all over the developing world, but there are people trapped in the cash economy in the developed world too.

The Bill and Melinda Gates Foundation is most, and deservedly, well-known for their work in tackling big, big problems such as eradicating polio. But what you may not know is that they have a programme called Financial Services for the Poor (FSP) which aims to help people out of poverty by providing digital financial services (DFS). The Foundation decided to create an external advisory group to help to steer, support and promote DFS. This is called the Platform Enablers Group, because the Foundation sees DFS as a platform for products and services that will make a real and sustained difference to the lives of least well-off around the world.

I was flattered to be asked to be part of this advisory group and honoured to be able accept (on behalf of my colleagues at Consult Hyperion who actually do the ground-breaking work in delivering financial services in Kenya, Nigeria and elsewhere). There are two reasons for this:

• The altruistic reason: my colleagues at Consult Hyperion have done some amazing work, from the original feasibility study for M-PESA to the implementation of TAP, and it feels  good to be able share some of the experience and expertise to help the Foundation change lives.
• The selfish reason: the other members of the advisory group are really smart and really interesting and I learn a tremendous amount from listening to them (especially when they argue – there’s no quicker way of learning about a subject than hearing two people who know all about it disagree!).

At a recent meeting of the group, there was a discussion about trying to identify the key conditions for payment innovation that could help with financial inclusion and therefore with social inclusion. The group discussions are according to the Chatham House rule, so I can’t attribute these comments (other than to say that they come from a very clever and very experienced person and I always take her opinions very seriously) but I wanted to share them. I should add that I do have the permission of the Foundation to use this picture to illustrate the discussion:

As you can see in the picture, the three enablers discussed were:

1. A reliable and efficient identity infrastructure. I will blog about this again some time in the future as I have been exploring some ideas about emergent identity infrastructures for emerging markets and I think there may be breakthrough strategies here. In many countries there are no ID cards, no population register and no consistent identifiers, so the cost of bring customers into a system while complying with demanding KYC/ATF/AML requirements is a barrier to progress. What if we made it easer for people to join the system and then defined their identity as the reputation generated within the system that could be later bound to external identifiers?

2. A real-time settlement system. Being able to move money instantly from one account to another works fine when both accounts are in the same system (such as M-PESA). But to scale, we need to be able send money between accounts with different organisations and even different kinds of institutions (e.g., between a bank account and a mobile operator account). There are a few different ways that this can work, as my colleague Dick Clark explained at the Mobile World Congress this year.

   As part of this work, MMU released a new paper titled ‘A2A Interoperability’ last week at Mobile World Congress in Barcelona that we co-authored with Consult Hyperion.

   [From New publication: A2A interoperability – making mobile money schemes interoperable | Mobile for Development]

   If it were possible to move money between payment accounts instantly (as you can do via the Faster Payment System, for example, in the UK) then it would mean that risk associated with a rich, multi-organisation environment would be reduced significantly.

3. A regulatory environment that allows new competitors to challenge the incumbents. The US has no equivalent of the EU’s Payment Institution (PI) licence, but this would be a practical way to allow new entrants access to the infrastructure needed to deliver great new products and services.

I couldn’t help but remark that the US has none of these with the result that, as another of the advisors pointed out, there are something in the region of a hundred million people in the US today who are unserved or underserved by the existing financial services providers.

For consumers, the costs of using cash are regressive and fall heaviest on the “unbanked” – mostly low-income individuals who can least afford it.

[From Cash Is a Wasteful System, but Hard to Replace - Room for Debate - NYTimes.com]

There are people trapped in the cash economy all over the developing world, and therefore denied access to the first rung of the ladder out of poverty, but there are people trapped in the cash economy in the developed world too.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

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I don’t think legislators should be panicked into making emergency laws about Bitcoin. Let’s think about what the principles should be and regulate accordingly.

The regulation of Bitcoin should be about the principles of something rather than the specific nature of the technology used, but without talking to a lawyer at length it is not immediately obvious to me what those principles might be. Supposing that there is something like a blockchain where the ownership of a digital asset is established by “the community” in some way, then what regulation is needed? The digital asset in the distributed public ledger is “owned” by a public key. Anyone or everyone with the corresponding private key can do what they like with it. No private key, no can do. If I steal your private key, say, and transfer away a digital asset that you control, will then that will be fraud (or whatever, please don’t email me about this if it turns out that it is actually some other form of specific criminal activity) and that is already illegal. This seems to me the essence of the discussions about smart contracts and cryptocurrency scripting that are closer to the heart of the future cryptocurrency landscape than the Bitcoin currency today is. If you have the cryptography, if you have the scripting, and if you have the smart contracts that they create, then what you need regulation for?

As far as the means of exchange (ie, retail payments) is concerned, I don’t see an issue. Overstock.com can accept anything they like as payment. They can take Bitcoins, soya beans or pork belly futures: it is up to them and their customers. I’ve written before that I think there is something of a misunderstanding about what Anglo-Saxon legal tender laws mean and imply. If you are a merchant and I am a customer, it’s a matter of private contract between us as to how I might pay. Obviously we can’t form private contracts that break the law, so we can’t decide that I will pay using sex slaves or Ketamine, but you get my point. I’m sure somewhere in the Canon of US Federal and State Laws there are statutes concerning what the currency is, but I wonder if there’s any such statutes concerning what a currency is? If there are, I’m genuinely interested to hear from people that know about this topic, as I’m pretty sure they wouldn’t include Bitcoin. This is why don’t really understand the story about Californian legislators AB-129 “Lawful Money” bill.

“This bill makes clarifying changes to current law to ensure that various forms of alternative currency such as digital currency, points, coupons, or other objects of monetary value do not violate the law when those methods are used for the purchase of goods and services or the transmission of payments.”

[From California Bill to Legalize Bitcoin and Alternative Currencies]

So it’s against the law to pay people using Amazon vouchers? I doubt it. I’ll have get back on to the lawyers to explain all of this me again, since I’ve no idea what this bill is for. If you and I agree to an swap Bitcoins, Marks & Spencer’s vouchers or old copies of The Daily Telegraph for lawnmowers, train tickets or cups of coffee, it’s up to us. There’s no law that says that I have to accept US Dollars or Visa cards or cheques.

As was observed in the discussion of the Snap Cafe, you cannot force a retailer to accept cash. If, however, you buy something from them and there is no contractual barrier to the use of cash, and you offer legal tender in payment, and they refuse it, then they cannot enforce the debt in court.

[From Payment and tender - Tomorrow's Transactions]

This is not to say that no regulation at all is required. In Mark Hochstein’s brilliant cover story on Bitcoin in American Banker he makes the point that exchanges (the in/out points for fiat currency) are a special case. If I am going to convert cash into Bitcoins or Bitcoins into cash, that’s a business that needs to be regulated. But it already is.

For many bankers, guidance released last year by the Treasury Department’s Financial Crimes Enforcement Network, which subjected virtual currency firms to the same know-your-customer requirements as traditional money services businesses, hasn’t sufficed to remove the scarlet “A” (for anonymity) from these startups.

[From Why Bitcoin Matters for Bankers - American Banker Magazine Article]

This seems to be an appropriate general approach and it isn’t a surprise to see other jurisdictions adopting the same approach, most recently Singapore, for example.

The Monetary Authority of Singapore will require intermediaries that facilitate the exchange of digital currencies to verify customers’ identities and report suspicious transactions to a unit of the city-state’s police

[From Singapore to Regulate Bitcoin Operators for Laundering Risk - Bloomberg]

I might have my own opinions on the extent to which the Financial Action Task Force (FATF) guidelines should be applied (broadly speaking I’m in favour of relaxing controls at the low-end and toughening controls at the high-end, as the FATF recommend in their risk-based approach) but I can see that the principle of this regulation makes sense. But regulating whether consumers can or cannot use Bitcoins to buy things or not doesn’t fit. Therefore, when comparing regulatory environments and trying to work out which might be appropriate, I would have thought that Bitcoin was more of a form of barter than anything else and, as it happens, the Bank of England agree with me.

As such they may have more conceptual similarities to commodities, such as gold, than money

[From Bank of England: Digital Currencies are Similar to Commodities]

Maybe the lawyers can tell us whether there is appropriate regulation that can be extended to the digital world, and I’d be interested to hear about it, but I really don’t think we should be panicked into emergency regulations about Bitcoins at all

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

The post Bitcoin regulation – don’t panic appeared first on Tomorrow's Transactions.

You may think payments regulation is a rather dull subject, but it isn’t. Angus McFayden from Pinsent Masons spoke about the changes to the regulation of the UK payment sector at the Westminster e-Forum on “Digital Payments in the UK” [PDF] that I spoke at last November. As I remember him pointing out, with characteristic accuracy, these changes are not going to drive down costs (there is nothing in the UK National Payment “Plan” about this anyway), which I would have thought to have been a reasonable goal. So what are they going to do? Well, they are supposed to improve competition while simultaneously ensuring stability and so forth.

How? You may remember that HMT (Her Majesty’s Treasury, the UK’s Ministry of Finance, essentially) had a public consultation on the options for UK regulation a while back, and…

So given it was what the government said they wanted, want the respondents said they wanted and, most importantly, what I said that I wanted… the government has decided to choose an alternative path and it now says it will create a new payment regulator

[From You searched for response to consultation - Tomorrow's Transactions]

So we are going to have a new payments regulator, and this will improve competition and ensure stability. Angus explained that this regulator, expected to be operational in April 2015, will have a number of powers and that one of them will be to mandate access to payment systems. This means for schemes, rather than direct access to accounts, and is laudable. If more organisations have access, there will be more competition and therefore, hopefully, reduced costs. So far, so not particularly interesting.

However, under proposed reforms to PSD2 things might move a little further and, somewhere downstream, there may be changes following on from the European Commission’s consultation on third-party access to the bank account, known as “XS2A”. In this scenario, I would be able to grant a licensed third party (a Payments Institution or bank, essentially) access to my bank account so that they could get the balance, look at transactions and perhaps even trigger FPS payments. Now this is really interesting. The potential for new services here is obvious and by removing an intermediary layer there should be a reductions in costs. But, and this is a big but as far as I am concerned, without the right identity infrastructure, the right security and the right compliance regime, this could be another Chernobyl.

I imagine that this is the sort of thing that will be discussed in London in February at the forthcoming “Payments Intensive”, where you can listen to Consult Hyperion’s Anthony Pickup and Adrian Kamellard, the Chief Executive of the Payments Council, amongst others, talking about payments regulation in more detail.

Payments Intensive 2014: Future Development and Regulation, will bring together key figures from business, legal and regulatory backgrounds, to discuss the most pressing issues in the payments sector today.

[From Payments Intensive 2014: Future Development and Regulation | Cecile Park Conferences]

The magnificent group of gentlepersons and scholars at Cecile Park have very kindly given Tomorrow’s Transactions a complementary delegate place at this event to dispose of as we please, so we’re having one of our blog competitions. If you are going to be in London on 6th February and would like to attend the Payments Intensive, then all you have to do is be the first person to comment on this post with the name of the British record label that has just released a version of Bach’s Wurttemberg Sonatas performed by the Iranian-American harpsichordist, Mahan Esfahani, and you will be given entirely free a place at the event (worth an astonishing THREE HUNDRED AND FORTY FIVE of your English pounds).

As always, the judge’s decision is arbitrary and capricious.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

The post What will the new UK Payments Regulator change? appeared first on Tomorrow's Transactions.