Crypto Currency?

BitCoinCrash

As the year draws to a close and with the vast majority of the more than 2,000 tokens trading below their heights or ICO values, the aggregate market losses of 2018 have been absolutely surreal.  According to coinmarketcap.com the current market value of the top 100 Cryptocurrencies as of November 2, 2018 is $207 billion –  down 75% from the height of $830 billion in January. Translated into “plain speak” – someone lost $623 billion on investments in Crypto currencies this year.

Add in the hundreds of millions of dollars in losses due to  this year’s two of  the top three Exchange hacks of all time;  Coincheck ($500 million) and BitGrait ( $187 million) both occurring this year, and it is safe to say 2018 has been a disastrous year for Crypto Currencies.  Yet the promise of the blockchain and decentralized secure –  and thus less costly financial services has not been totally shattered. A look at my T-shirt should give you a hint as to where I believe the industry should be moving.

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Unsustainable Poverty

Two thirds of wealth will be owned by 1% of the human population by 2030.

Distribution of Wealth

American middle class

Sadly needed, political systems and political leaders to serve the people.

Such disparity of wealth is immoral, obscene and a sign of political failure. It should be the concern of all people empowered to do something about it. It wasn’t sustainable in 1789 and it will not be sustainable in 2030.   We need leaders who have the intellect, compassion and moral compass required to set aside partisan and self interests, earn the respect of the majority of citizens, and do what is right for all of humanity.  Leadership a quality in short supply in political circles.

RichGold

 

credit-card

Payments will be a $2 Trillion industry by 2025!

According to a recent study published by Boston Consulting Group, revenues earned by the payments industry  will grow to an astonishing $2 trillion by  2025.

https://www.bcgperspectives.com/content/articles/financial-institutions-technology-digital-global-payments-2016-competing-open-seas/?utm_source=201612FI&utm_medium=Email&utm_campaign=bd

 

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Woopie you say, how can I get my share of this windfall? What the study fails to point out is that revenues of $2 trillion for someone also represent costs of $2 tillion for someone else.  The reality is that the bulk of this $2 trillion dollar expense will be due to our use of credit cards.  Generally speaking I thought there was a broad consensus  that we are already paying too dearly for the privilege of using  our credit cards so you would  have thought this report should have proven alarming.

I understand as we migrate from shopping in physical stores to shopping on e-commerce sites, there are some benefits of credit cards, however I’m pleased to more use of debit cards for online expenditures.  I also know there are even better way to digitize cash than tying it to our identities and certainly  better ways than tying to our identities and a financial product which is post paid.  Sure it’s convenient to put everything on plastic and being totally truthful here, I have to also admit I often fine myself totally devoid of cash in my wallet and coins are one of my pep peeves.  But be assured my fellow countrymen we do have a problem here?

The problem is the $2 tillion number along with the ugly realization that the  size of this number directly correlates to the number of places refusing to accept cash, which will only grow.  First it was gas stations who made it nearly impossible to purchase gas without a credit card, then it was car rental agencies, have you ever tried to rent a car by paying cash? Where will it all end, being forced to pay for every service and every good consumed with a credit card? Are we going to be satisfied with leaving little digital tracks of everywhere we go throughout each and every day. How big will  the number be $5 trillion, $10 trillion…. do I hear $20 trillion?  I worry about us as individuals being free of both big Government and big business. I ridicule those who are naive enough to believe a “Cash Back” credit card is a good deal. Maybe good to beggar thy neighbour if you escaped unswatched by annual fees and pay off your debt each month.   If I am forced to use a Credit Card for everything I purchase then I begrudge my loss of personal choice, my subjection  to increased risk of ID theft and yes I  feel the cost in terms of merchant fees is simply too large an extraction of wealth from each and every  human exchange or interaction.

My I suggest it may be wise for us all to pause for a moment and perhaps offer up some resistance to our collective urge towards this  “plastic pay later mentality”.  There are certain purchases I am now making on a credit card, which offer little more convenience and are being made at greater cost than cold hard cash. For example  I recently started to use the City’s parking app to pay for parking. Admittedly very convenient, but who among us takes the time to ponder the total ramifications. Is parking  my car soon to be yet another service I am forced to use a credit card?  In an not too distant past I slipped a “toonie” in the meter and parked with utter abandon. Now I must surrender by credit card details to some app (who knows where my name and number may end up or be used) but no the ramifications are even greater, the City which after all is me the taxpayer, is paying an extra 6% to collect my parking fee (and I already own and have paid for the damn meters) and another city employee, the guy collecting the coins, is now out of a job so the middle class shrinks yet again. Donald Trump should know about this as the app was probably written in Bangalore.

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Speaking of Bangalore, I find it very perverse that India of all places, with among the highest per capita poverty rates in the world, would abruptly scrap 85% of it’s currency.  I rarely see eye to eye with Steve Forbes who called this callous act , “breathtaking in its immorality” in a recent editorial, but Steve was right on the money (couldn’t resist) for totally different reasons than he thought. Cash is a public good, created for and by the people almost every other payment method even though it most often has cash as its foundation is a private good  (Visa, PayPal,Wepay etc) controlled and own by private companies. When good intentioned government “kill off” cash for what may appear to be legitimate reasons; tax evasion, underground economies and money laundering, they will effectively forced all the decent law abiding citizen into the hands and control of those private companies who have already amply demonstrated a greedy propensity to excess profits. Let’s assume India keeps a few rupee notes for nostalgia and the money supply is only 5-10% of the e-cash in circulation, don’t they lose some control over monetary policy? Seriously Government have a responsibility to protect the citizenry and I for one hope some bright economist in New Delhi, and in every capital of every country is figuring out how best to create e-cash, or a digital currency, which we can all use and will firmly remain a public good.

Why it should cost much less

The cost of moving money, which has become as easy as moving “bits” on the internet,  should be much lower than the fee banks and card companies presently charge for the service. The banks have been slow to pass these saving on to their customers in an attempt to protect legacy pricing revenues. The current rate to move money by bank wire service, as a business, remains stubbornly high at $30-$45 even as the banks offer more competitive fees of $19-$15 to individuals due to increasing competition by non-bank financial service companies. There is absolutely no justification or need for such high fees and if banks attempts to justify these fees by citing regulatory compliance costs it is time to reexamine money movement regulatory frameworks.

In particular the cost and burdens of collecting and protecting client information, the so called Know Your Customer (KYC) regulations should be eliminated. I advocate totally scrapping KYC for any money movement under a reasonable amount and reasonable frequency. Any money transfer under USD10 K per day, or its foreign value equivalency, should be free of current KYC regulatory oversight, and KYC should be replaced by strong authentication of individuals which can both authenticate and at the same time provide 100% protection of individual privacy and thus the threat of identity theft.  The technology exists and moving money at the true costs of moving the bits representing the money benefits society at large. In particular moving money on a non-profit basis can play major role in financial inclusion and alleviation of poverty world wide. Essentially replace KYC by Know Your Merchant (KYM) and use anonymous multi-factor authentication of individual clients.

Here is an excellent paper on the impediment of innovative practices, mostly mobile money practices,  that arcane regulations fosters.    When a physical device is required to move money such as a mobile phone, it becomes one key or one token in a multi-factor authentication regime. Add a bio-token able to authenticate but not uniquely identify, and a knowledge token (PIN) and you have an acceptable secure method for authenticating and moving money without KYC.

What Security?

Who’s guarding the bank now that it’s on your mobile? Protect your identity at all cost.

When we entrust our money and our business to the global financial infrastructure as developed by the world’s largest banks and service groups such as SWIFTS we assume our transactions will be secure. Unfortunately  by having computerized most of our banking activity, from chip payment cards to online internet banking where the internet has become the staple of financial flows we see increasingly and alarmingly how naive our assumption has been.

I’ve recently been wiring funds overseas and it amazes me how intrusive the identity requirements are. Even purchasing bitcoins causes unwarranted risk and exposure of my identity.  Seventy-five percent of of companies in the world  now experience serious fraud incidences and listen carefully; more than 80% of these incidents are perpetrated by insiders. Remember this the next time you are providing personal information to wire funds overseas or when the telephone banking clerk asks you all of those personal questions to identify yourself. The current model and mode of operation relying on positively identifying the customer (KYC or Know Your Customer) is seriously flawed and no longer warranted. Identity theft is itself now a large part of the problem with with more than 45% increases in lost of identity year over year. Equally alarming is that 49 % of identity thefts were the result of theft from our governments, the very people we entrust with Social Insurance Numbers, Medical records and personal tax and benefits accounts. ID theft2 .

It is difficult to instill a fresh perspective and to affect change when the threat models evolve more quickly than the regulatory framework and/or the deterrence so why can’t we get our banks, card companies, department stores and our governments to stop asking us to identify ourselves with such easily stolen credentials?  In a world of cyber warfare when data breaches are occurring in everything from our income tax records to our voters lists it isn’t just our Credit Cards we need to protect. We are being forced to surrender our identity to so many agencies and services who repeatedly and blatantly allow this information to be stolen? Over dependence upon proof of personal identity is robbing us of privacy and personal liberty which are suppose to be the hallmarks of a democratic and free society?  If your identity hasn’t yet been compromised read this sample case to prepare yourself as it is only a matter of time before you will suffer the same fate.  Personal ID theft.

More than one million incidents of card scams, online and telephone banking and check frauds occurred in the U.K. in the first six months of the year, according to Financial Fraud Action U.K., an industry body funded by banks. That’s an increase of 53% over the same period of last year, meaning one such crime is now committed every 15 seconds, the FFA said.   Hackers and Fraud rings are resulting in major financial losses. Early in 2016, an international criminal syndicate was able to successfully impersonate bank officers at over 100 banks around the world to net as much as $900 million in stolen funds. Last year the Boleto Fraud Ring siphoned $3.75 billion from Brazilian banks. Throughout 2016, SWIFT officials have grappled with a series of cyber attacks. In February, attackers used SWIFT codes to break into the account of the Bangladesh central bank and send fake payment orders to the Federal Reserve Bank of New York, leading to the theft of $100 million. Some of the money has been tracked down and retrieved, but $81 million is still missing. Not disclosing your identity and using cash, as much as governments don’t like it, appears to be the safest bet.  AML and fraud deterrent costs are more than $8 billion and growing at double digit annual rates while the situation only continues to worsen.  Identity theft is growing at double digits rates and identity thieves will open new accounts and take over more existing banking and credit card accounts in 2017. Hackers will also be target other types of accounts especially those linked to credit cards, including iTunes, Amazon, PayPal and eBay. It is estimated that Cybercrime represents $575 billion in losses and fraud losses in general are 5% 0f global corporate income or 3.5 trillion. Regulations current and pending will be counterweighted by operational costs and customers’ rising expectations on the “speed” of commerce so a new model and fresh vision is required. It is very doubtful that the large banks or the regulators who both suffer from overly bureaucratic operational modes will be able to deliver.

This is especially damaging to our collective well being in that the theft or siphoning off of  such huge amounts of wealth goes unannounced and is simply absorbed into the costs of doing business – precisely because Banks are so profitable. In other words we all pay for these losses in higher fees and the Banks can continue to operate within the law and with impunity by protecting the status quo rather than becoming truly innovative more quickly because they are too big to fail.  We should have learned this lesson when we bailed out the banks in 2008 as the whole system teetered on the brink of collapse.  Rather than creating new regulations to attempt to get ahead of the fraudsters, (it’s not going to happen) our Governments should be taking a proactive stance and  force the Banks to act like,  or partner with Fintech startups, to  focus on increasing security via innovation rather than continuing present day practices of charging  excessive user fees to absorb these losses. We all rely upon a solvent and efficient banking system so before being forced to “bail” out the exceeding profitable bankers again let’s provide targeted tax credits for increased innovation to protect our communal asset.  Internet Fraud

The role of regulation in stifling innovation.

FCA

Certain jurisdictions get it!  For the Fintech industry to thrive and bring secure efficient and value added financial products to market the unholy regulatory regimes must be parked.  Anti money laundering and proceeds of crime legislation is certainly required and could even be improved to be more effective but what is NOT needed is to allow vested interests to create fear on the part of regulators to stifle competition from startups. Payments and money transfer are the very lifeblood of the global banking industry earning the major multinational banks 40% of their revenue.  The banks are by and large extremely profitable and very institutional so don’t expect them to embrace change and  offer simpler less costly methods of paying and moving money unless they and their current business models are threatened. Far easier to cry wolf and put regulators into a  frenzy then to dismantle systems which have proved enduring and profitable for many years.

The UK with their Financial Conduct Authority FCA   and Singapore whose Monetary Authority of Singapore (MAS) have also embraced the same type of policies to encourage young companies to innovate by “cutting FinTech start up some slack” in regulatory requirements. A huge impediment to young Fintech’s bringing new and disruptive models of Financial Services is regulatory risk. Study after study has shown the negative impact of highly regulated regimes when trying to introduce new financial service models. Take mobile payments as an example in those countries where regulations have been eased to allow Mobile Network Operators (MNO) to introduce mobile money product independent of banks they have generally flourished, whereas when regulators force the inclusion of a Bank partner to legitimize such mobile schemes they have largely failed. It is rewarding to see the loosening of regulatory frameworks in the UK and Singapore beginning to blossom and bear fruit. As examples look to Transferwise   in the UK, brought to you by some of the same people who disrupted the telecom industry with Skype or Fast-And-Secure-Transfer commonly known as FAST in Singapore which was developed and is operated by  Banking Computer Services Private Limited (BCS) and is now supported by all major banks in Singapore. It is also wonderful to see a bank such as DBS cleaning up on the rewards; recently being rated as the best DIGITAL BANK in the world by Euromoney magazine while at the same time also being rated the safest bank in Asia six years running.  Security and fast  innovation (sorry for the pun) actually go hand in hand and are not oxymorons.

It seems strange with all the AML/CFT regulations that the criminal side of money transfers continues unabated, perhaps it is because criminals are very resourceful and don’t abide by legal regulations anyhow.  In closing I’d like to share the following additional concern I have on over regulation of the FinTech sector which is the inevitable breach in our privacy.

Fintrac

 

Panama Papers

panamaft$32 trillion kept in offshore holdings

Surprise, surprise, the 1% has been hiding their wealth and legally or not avoiding taxes so the rest of us can presumably pay more to maintain the standard of living and/or be pushed into poverty. As the middle class all but disappears, in even wealthy and previously more equally  distributed income countries like America, this concentration of wealth has become a problem not too dissimilar to Global warming. Advancing perversely by themselves and difficult to reverse in time to save the globe from becoming too hot for human life, or destroying the very fabric of civil society. How to save the world from itself as climate change renders the planet we all call home uninhabitable and the unrestricted accumulation of wealth (greed)  causes the have nots to raise up and destroy the world order.

Let me begin by saying I have no problem with disparate incomes in principle. People who work hard to further their skills and knowledge and then apply themselves diligently in the pursuit of wealth deserve as much money as  they feel they need and/or they desire. The basic human right to enhance one’s well being legally over those who fail to work hard and/or have no ambition for a richer life in terms of material well being should be maintained and protected. Freedom to accumulate wealth provides individuals the incentive which invariable creates a higher standard of living. I don’t think anyone genuinely rejects William Gate’s or Edmon Musk’s right to be wealthy and by and large both of these gentlemen are net contributors to a better life for every human being on the planet.  Remember life is a game, and money as a system of barter and as a store of wealth, and the rules of the game we play were all created by us. There is nothing natural about money or for that matter for the political economic systems we have created. In a world of “Big Data Analytics” and “digital money flows” we the people should be better able to control and exploit this wealth (play thing)  to everyone’s mutual benefit. Change the rules of the game in a positive manner  and lives will change for the better and we may  not experience the current human outcome of wealth being accumulating and secretly hidden away for fear of taxation?

I also detest “big government” another part of the game and government’s propensity to over tax and often squander the tax receipts. In fact I’m not one of the 1%,  but I would wager a bet if one were to interview the super rich hiding their wealth  it is certainly their  honest belief that governments would “waste the money” taxed away from them which causes their somewhat rational behaviour.  Few people, rich or poor, would advocate zero taxes as everyone recognise a need for, and means for paying for, common goods. Most reasonable people recognize that it is neither sustainable nor just for 1% of the human population to control more wealth than the remaining 99% when a majority of the world still lives in abject poverty and millions of people living in poverty, due to circumstances beyond their control (for example being born into poverty) actually work harder every day of their poor lives than the 1% ever did. We all seem to understand the problem that the rich get richer and the poor get poorer and we should all be able to see an unhappy ending for this trend. So what is to be done? Change the rules of the game.

I believe the solution lies in “coached philanthropy” not forced higher taxation. My father always told me as a young boy, “From those according to their ability to those according to their needs” which seemed a pragmatic way to solve our dilemma but education and incentives for the 1% to follow the example of those relatively few noteworthy extremely wealthy people who have chosen to give of their time and their wealth seems a more appropriate method of correctly today imbalances. It seems so much more acceptable than yesteryear’s rant “to tax the rich and give to the poor”, and one only need look at supposedly communist China to see how well this philosophy of income redistribution works. China which has nominally been a communist country for 67 years (since 1949) has had a consistently higher Gini Coefficient  (0 represent perfect equality of income and 1 represents perfect inequality – one person receiving all the income) or less income equality  than Canada (my home) and most other wealthy G7 countries each and every year since 1949 in which it  has been measured and China’s Gini is still increasing.

What humanity needs I believe,  is a United Nations sanctioned multilateral worldwide tax on savings or “parked capital”,  regardless of which country in which it being saved (or which mattress it is hidden under).  This may seem heretical to many people’s ears, “isn’t a lack of personal savings part of the problem in America?”, but wait there are two caveats; only savings above a prescribed maximum amount “being the rainy day fund” a level of saving set by national governments based on the national cost of living would be taxed, and there would be heavy taxation on personal consumption.  Capital that sits and accumulates more capital into fewer and fewer hands simply by being held is a wasteful distortion or unintended consequence of the rules of the game.    Rather than causing exceptionally wealthy people to feel they need to squirrel money away I would advocate zero tax on worldwide incomes,  a slightly burdensome tax on consumption and an extremely burdensome tax on “parked capital”, that is money that is not being re-invested as working capital.

The $32 trillion which the Panama papers say is parked in offshore deposits, should be being spent to create income,  fueling rapid economic growth for the betterment of humanity and via a ripple effect increasing incomes worldwide. Only when capital is consumed, or money is spent for personal consumption on nonessential goods or services; luxury cars, travel, luxury homes expensive jewelery, alcohol and substances would it be taxed by governments which will be pared down and form a smaller and smaller proportion of the economy (and yes the work force) perversely because all this “parked capital” will be put to work building infrastructure (building roads, bridges, parks, hospitals,schools,  arenas) to create untaxed income.  The effect would be that very rich people instead of accumulating capital (money)  would begin to accumulate goods which have higher utility to humanity than parked capital. Why wouldn’t a rich person pay someone more money to try to create more income which is not being taxed ? Income is good realized profits are not. Just keep investing round and round we go with brand new rules of the game.

The rules will dictate and I advocate that this unprecedented rush –  this virtuous cycle of private money flowing through the veins of a supercharged healthy economy  be spent by the private sector who are much better equipped and skilled to spend societies excess capital (savings above the rainy day fund)  than would be any bureaucratic civil service. Let’s make money and increase incomes worldwide, no taxes on incomes for anyone.  Even the very wealthy will be relieved of their current deviant behaviour of hoarding money for the sake of hoarding money and will be pleased to keep money cycling through the economy, paying higher wages to make more income, for only when it is parked would it become taxable. What do you think is it time to change the rules of the game of life?