Category: Digital Disruption

Is Bitcoin Money?

From Daily Reckoning

At various times in history, feathers have been money. Shells have been money. Dollars and euros are money. Gold and silver are certainly money. Bitcoin and other cryptocurrencies can also be money.

People say some forms of money, such as Bitcoin or U.S. dollars, are not backed by anything.

But that’s not true.

They are backed by one thing: confidence.

If you and I have confidence that something is money and we agree that it’s money, then it’s money. I can call something money, but if nobody else in the world wants it, then it’s not money. The same applies to gold, dollars and cryptocurrencies.

Governments have an edge here, because they make you pay taxes in their money. Put another way, governments essentially create an artificial use case for their own forms of paper money by threatening people with punishment if they do not pay taxes denominated in the government’s own fiat currency.

And the dollar has a monopoly as legal tender for the payment of U.S. taxes. According to John Maynard Keynes and many other economists, it is that ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value. This theory of money boils down to saying we value dollars only because we must use them to pay our taxes — otherwise, we go to jail.

So-called cryptocurrencies such as Bitcoin have two main features in common. The first is that they are not issued or regulated by any central bank or single regulatory authority. They are created in accordance with certain computer algorithms and are issued and transferred through a distributed processing network using open source code.

Any particular computer server hosting a cryptocurrency ledger or register could be destroyed, but the existence of the currency would continue to reside on other servers all over the world and could quickly be replicated. It is impossible to destroy a cryptocurrency by attacking any single node or group of nodes.

The second feature in common is encryption, which gives rise to the “crypto” part of the name. It is possible to observe transactions taking place in the so-called block chain, which is a master register of all currency units and transactions.

But the identity of the transacting parties is hidden behind what is believed to be an unbreakable code. Only the transacting parties have the keys needed to decode the information in the block chain in such a way as to obtain use and possession of the currency.

Murdered Soviet Economist Exposes Next Crash

This does not mean that cryptocurrencies are fail-safe. But on the whole, the system works reasonably well and is growing rapidly for both legitimate and illegitimate transactions.

It’s worth pointing out that the U.S. dollar is also a digital cryptocurrency for all intents and purposes. It’s just that dollars are issued by a central bank, the Federal Reserve, while Bitcoin is issued privately. While we may keep a few paper dollars in our wallets from time to time, the vast majority of dollar-denominated transactions, whether in currency or securities form, are conducted digitally.

We pay bills online, pay for purchases via credit card and receive direct deposits to our bank accounts all digitally. These transactions are all encrypted using the same coding techniques as Bitcoin.

The difference is that ownership of our digital dollars is known to certain trusted counterparties such as our banks, brokers and credit card companies, whereas ownership of Bitcoin is known only to the user and is hidden behind the block chain code.

Bitcoin and other cryptocurrencies present certain challenges to the existing system. One problem is that the value of a bitcoin is not constant in terms of U.S. dollars. In fact, that value has been quite volatile, fluctuating between $100 and its present high above $3,400 over the past few years. It’s currently around $3,467.

It’s true that dollars fluctuate in value relative to other currencies such as the euro. But those changes are typically measured in fractions of pennies, not jumps of $100 per day.

One potential solution to the Bitcoin volatility problem I find interesting is to link Bitcoin to gold at a fixed rate. This would require consensus in the Bitcoin community and a sponsor willing to make a market in physical gold at the agreed value in Bitcoin. This kind of gold-backed Bitcoin might even give the dollar a run for its money as a reserve currency, especially if it supported by gold powers such as Russia and China.

Both are looking for ways out of the current system of dollar hegemony, which will only take on added urgency now that the U.S. has imposed harsh sanctions against Russia and is signaling a trade war against China.

Bitcoin’s ‘hard fork’ becomes a reality

From Fintech Business.

Bitcoin cash has entered the scene as bitcoin finally split into two this week following years of community infighting about the future of the bitcoin blockchain.

However, Melbourne-based Blockchain Centre chief executive Martin Davidson said bitcoin cash was just one among many other ‘alt coins’, or bitcoin alternatives, available.

“Bitcoin cash can be thought of as another alt coin just like Litecoin and hundreds of other crypto currencies which have been created by a group of developers who want bitcoin to have a larger block size, rather than follow the road map set out by the Bitcoin Core development team,” Mr Davidson said.

The new bitcoin cash blockchain contains all the information from the previous blockchain but has eight times more transactional capacity (8 megabyte) than the original (1 megabyte), making transaction speeds on the new virtual currency much faster.

The fork was triggered due to a split in the bitcoin community over how to handle the increasing volume of traffic on the 1 megabyte blocks as bitcoin grew more popular.

Though bitcoin cash is only a few days old, it’s possible it will have its own community of users, much like ethereum classic and ethereum, according to Mr Davidson.

“It’s quite possible bitcoin cash will have its own network infrastructure, application layer services and new user base who like the value bitcoin cash brings over the existing, longest standing and most valuable crypto currency, the original bitcoin,” he said.

Blockchain Australia board member Lucas Cullen says most of the bitcoin community is resistant to change, and will likely gravitate towards the coin with the better software.

“There have been many attempts to convince the community that their version [of bitcoin] is better, but most of the time it’s about a majority — and I think most of the bitcoin community are pretty stubborn and pretty resistant to change,” Mr Cullen said.

“We’re pretty risk adverse.”

Announced in a tweet by CoinDesk, the first bitcoin cash block was mined at 2:14am on 2 August (EST). Since then, 24 more blocks have been mined (at the date of writing).

The value of bitcoin dropped from US$2,854 to $2,729 on the day of the fork, and bitcoin cash already has a market value of US$7 billion, according to Mr Davidson.

“And its great news from a financial perspective for all bitcoin holders as everyone who held their own bitcoins before the chain split or fork, now have an equal amount of bitcoin cash coins also,” he said.

zipMoney and Westpac Enter Strategic Relationship

In an announcement today, zipMoney has secured a $40m strategic investment from Westpac at $0.81 per share (a 14.1% premium to the last closing price).

The purpose of the investment is to allow Westpac to explore the rollout of Zip’s products and services across Westpac’s payment network.

The deal is expected to close on on 10th August 2017.

zipMoney is an ASX-listed company, which offers point-of-sale credit and digital payment services to the retail, education, health and travel industries. Zip’s platform is entirely digital and leverages big data in its proprietary fraud and credit decisioning technologies to deliver real-time consumer responses.

They provide a variety of integrated Retail Finance solutions to small, medium and enterprise businesses across numerous industries, both online and in-store.

zipMoney offers a 100% cloud-based platform that leverages its proprietary technology and Big Data to enhance the proven fundamentals of promotional finance, in particular interest-free.

zipMoney is focussed on acquiring prime, near prime and emerging prime borrowers by providing those customers with a revolving line of credit to finance their retail purchase. zipMoney does not target sub-prime or payday borrowers. zipMoney is acutely focused on simplicity and delivering transparent, responsible, and fairly priced consumer credit products.

zipMoney is a licensed and regulated credit provider managed by a team with over 35 years’ experience in providing finance solutions at point of sale.

 

Major bank mortgages to go digital

From The Adviser.

With the 1 August deadline looming for paperless refinancing, one major lender has explained how technology is reshaping the way it delivers home loans.

Mortgage providers from across Australia are in the process of digitising their back-office operations. The migration to e-conveyancing has been a significant event in the evolution of the Australian mortgage market. More than 120 lenders have now signed up to exchange property online through PEXA’s network, where almost $58 billion worth of property has transacted to date.

From 1 August in NSW and Victoria, commercial standalone mortgages will need to be lodged electronically by ADIs, while in NSW and Victoria, refinance transactions will have to be lodged electronically where both mortgagees are ADIs.

According to Marielle Yeoh, PEXA’s chief financial services officer, the best way for brokers to prepare for the change is to ask lenders if the transaction will be settling on PEXA and to share with customers and borrowers that there is now a new way of settling electronically.

NAB is at the forefront of these changes and sees the property industry moving towards 100 per cent digital settlements. The group’s general manager of customer lending operations, Gary Howard, said that digital settlements have a number of benefits for NAB and its customers.

“It gives us greater flexibility to deliver outcomes quickly for our customers,” Mr Howard said. “It also results in less duplication and cost. Leveraging technology will give our people the opportunity to focus on more personalised service, and for our customers it means increased security and real-time access to funds.”

Improving turnaround times and delivering a better customer experience in home lending are key competitive advantages in a market where rate matching is common.

NAB believes that digital allows for a wide range of opportunities. “Certainly, there are a number of layers and legacy systems and processes within the mortgages process, and many of these processes are geared towards paper,” Mr Howard said.

“To digitise the entire mortgage process, end to end, we need to think differently and look for opportunities to innovate . . . and we are,” the chief said. “PEXA is a great example of what is possible and how we can progress towards delivering a better customer experience by going digital.”

Traditionally, some mortgage brokers have considered elements of digital processes a threat. This appears to be changing, with more and more brokers integrating digital solutions into their own businesses to drive efficiencies and improve productivity.

While NAB remains focused on delivering digital solutions in the mortgage space, Mr Howard recognises that not all areas need an electronic touch.

“We’re focused on delivering digital solutions that are driven by customer needs,” he said, “but that doesn’t mean everything is going to be digitised, particularly where relationships and human advice counts.”

NAB recently strengthened its partnership with REA Group by announcing the sale of Choice Home Loans to the ASX-listed real estate listings giant. A fresh line of white-label mortgages has been tipped to hit the market as part of the NAB/REA deal.

But brokers are firmly on the group’s radar. Speaking at NAB’s Knowledge is Everything road show in Sydney back in April, EGM of broker partnerships Anthony Waldron said that he expects broker market share to exceed 70 per cent over the coming years.

Mr Waldron explained how consultation on the ASIC remuneration review, for example, could further boost third-party share by improving trust.

“It’s the opportunity for more people to understand what brokers do; it’s the opportunity to build trust even further in what you do. And if we can do that then we won’t be talking about 53 or 54 per cent of mortgages going through the broker community. We will be talking about more like the numbers in the UK where it is already in the 72 or 73 per cent.”

Nevertheless, big banks acknowledge that the digital age is here, and NAB’s Mr Howard is confident that the property industry is moving towards “100 per cent” digital settlements.

Mr Howard said: “Within a few years, we expect the majority of transactions will be performed electronically.”

Updated 09 August. Note the statement from WA’s Landgate.

Taking into consideration industry feedback, the Registrar of Titles has revised the information published in CIB289.

The Registrar will now require the move to electronic lodgement of land transfer documents via an Electronic Lodgement Network Operator (ELNO) by regulation.

The regulations are expected to be in place during Q4 2017.

From 1 December 2017, all eligible mortgages, discharges of mortgages and refinances must be lodged electronically.

From 1 May 2018 all eligible, stand-alone transfers, caveats and withdrawal of caveats and any lodgement case consisting of eligible discharges, transfers, mortgages, caveats and withdrawal of caveats must be lodged electronically.

The Registrar of Titles and the Minister for Lands are in agreement that this approach is fair and clear, and provides the necessary legal clarity for government and industry.

With current market conditions, and the extra time allowed to prepare for the changes, the Minister and Registrar encourage all settlement agents to inform themselves on e-conveyancing, register and begin transacting electronically as soon as possible.

Landgate has provided considerable information to industry on the nature of the changes, and has sponsored the Australian Institute of Conveyancers, Western Australian branch to provide its electronic conveyancing accreditation program.  There has also been a series of roadshows presented by Property Exchange Australia (PEXA) to take interested settlement agents through the electronic lodgement process and answer any questions.  Landgate will continue to support industry through this transition.

Computer says no: robo-advice is growing but we still don’t trust it

From The Conversation.

People are open to receiving financial advice from robots, our studies show, but there might be a way to go to in convincing people to trust them over a human.

We surveyed 138 people about their attitudes to, and preferences for, superannuation advice from a human or a computer. Unsurprisingly, most stated they would prefer to deal with a human across a broad range of financial decisions.

Some did prefer the computer – these tended to be younger people, and those on higher incomes. In a follow-up study we tested whether this would change after people actually used the technology.

We did this by exposing 101 people to an online calculator, in which they learned how increasing their superannuation contributions would change their income in retirement. We compared these to another 101 people in a control group who simply read some general information about retirement income.

A little over half of our sample indicated that they would trust robo-advice. Those who got advice from the online calculator showed a small, but statistically significant, increase in trust towards robo-advice. However, most still stated they preferred human advice, and were slightly less willing to pay for automated advice after trying out the calculator.

The openness of younger people is encouraging, as they tend to be the most disengaged from their superannuation, but also have the most to gain from getting it right (as the benefits will build up for longer).

How the robots could help

Automated financial advice systems (so-called “robo-advisors”) have great potential to extend the reach of professional financial advice.

Digital technology has quietly revolutionised the world of banking and financial services. Automatic Teller Machines (ATMs) were an early example of a computer replacing a human worker. Interestingly banks responded to this increasing productivity by employing more people.

Financial advice is the latest frontier for automation, with a number of “robo-advisors” beginning to interact with customers. Even though we face a growing number of financial decisions, most Australians currently don’t get formal financial advice. Cost is a significant barrier to this.

Like many digital products, robo-advisors are costly to design and build, but once up and running they can serve large numbers of people. These bots could extend low-cost and dependable advice to those who currently miss out.

Robo-advice is currently a small part of the financial services market, but it is forecast to grow rapidly. In the US, firms such as Betterment and Wealthfront have begun to disrupt the wealth management industry. In Australia robo-advice products are being developed both by startups and industry incumbents.

But financial advice is about more than numbers. While technology can easily handle the maths, people may also need the human touch. They may want emotional support and motivation, rather than just the cold hard facts, to get them to confidently engage with these difficult and important decisions. Trust requires good design.

Digital technology might also prove useful in getting people more engaged with their financial decisions. Most Australians pay remarkably little attention to their superannuation, even though it makes up a significant portion of our overall wealth (second only to the family home).

Robo-advice could help people learn, and try out different scenarios, without the worry of appearing ignorant to a person. Unfortunately, our experiment found little evidence for this – overall levels of motivation, and perceptions of autonomy and competence were unchanged.

Distinguishing between people who were initially more engaged or less engaged with their superannuation, our study showed that the online calculator had a greater impact on those who were initially less engaged. This suggests robo-advice might prove most useful to those who need it the most, making them feel more competent and in control.

So for those of us who don’t pay enough attention to our financial decision-making, the robots are here to help.

 

Authors: Andrew Reeson, Behavioural Economist, CSIRO; Andreas Duenser, Research Scientist

 

Cash Still In The Payment Mix

A research discussion paper from the RBA – “How Australians Pay: Evidence from the 2016 Consumer Payments Survey” –  provides further evidence of the migration to electronic and digital payment mechanisms, but also underscores that cash remains a critical payment mechanism for many, especially in the older age groups. Given the fast adoption of mobile payments, the 2016 data will already be out of date!

Using data recorded information on around 17 000 day-to-day payments made by over 1 500 participants during a week, the report shows that Australian consumers continued to switch from paper-based ways of making payments such as cash and cheques, towards digital payment methods (particularly debit and credit cards). Cards were the most frequently used means of payment in the 2016 survey, overtaking cash for the first time. Contactless ‘tap and go’ cards are an increasingly popular way of making payments, displacing cash for many lower-value transactions.

 

Despite these trends, cash still accounts for a material share of consumer payments and is intensively used by some segments of the population.

Payments using a mobile phone at a card terminal are a relatively new feature of the payments system and this technology was not widely used at the time of the survey. However, consumers are increasingly using their mobile phones to make online and person-to-person payments. Similarly, consumers are using automatic payments, such as direct debits, more frequently.

 

Open Banking May Catalyse Digital Disruption

Last week Treasurer Scott Morrison’s media release on the proposal to introduce an open banking regime in Australia was framed around the requirement for banks to be able and willing (with customer agreement) to share product and customer data with third parties.

The timing is interesting given the disruptive rise of FinTechs and the fact there are new entities emerging across the banking value chain. Until recently banks tended to regard their data as a strategic asset (for example not sharing default data) but with positive credit now in force, this is already changing. So this is a logical next step, and should be welcomed.

From our work whit a number of FinTechs we know that access to data is one of the barriers to success, alongside concerns about data security, and identity fraud. Opening the door to data sharing may be laudable, but there are significant technical issues to work through.

If open banking arrives, it would have the potential to increase competition, and perhaps put pressure on bank product pricing, as well as differentiated servicing; but we will see. It may open the door to more automated product switching, as well as better portfolio management and cross-selling. It certainly is another dimension in the wave of digital disruption already in play, which is ultimately being facilitated by the adoption of mobile technologies and devices.

The Turnbull Government has commissioned an independent review to recommend the best approach to implement an Open Banking regime in Australia, with the report due by the end of 2017.

Greater consumer access to their own banking data and data on banking products will allow consumers to seek out products that better suit their circumstances, saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models to drive greater competition in banking and contribute to productivity growth.

The review will be ably led by Mr Scott Farrell. Mr Farrell is a Partner at King & Wood Mallesons and has more than 20 years’ experience in financial markets and financial systems law. Mr Farrell has given many years of service to the public and private sector in advising on, and guiding, regulatory and legal change in the financial sector. He has intimate knowledge of the financial technology (FinTech) sector and is a member of the Government’s FinTech Advisory Group.

Mr Farrell will be supported by a secretariat located within Treasury and will draw upon technical expertise from the private sector as required. The review will consult broadly with the banking, consumer advocacy and FinTech sectors and other interested parties in developing the report and recommendations.

The Review terms of reference have been released and an Issues Paper will shortly be made available for interested parties to provide input to the review.

Purpose of the review

The Government will introduce an open banking regime in Australia under which customers will have greater access to and control over their banking data. Open banking will require banks to share product and customer data with customers and third parties with the consent of the customer.

Data sharing will increase price transparency and enable comparison services to accurately assess how much a product would cost a consumer based on their behaviour and recommend the most appropriate products for them.

Open banking will drive competition in financial services by changing the way Australians use, and benefit from, their data. This will deliver increased consumer choice and empower bank customers to seek out banking products that better suit their circumstances.

Terms of reference

  1. The review will make recommendations to the Treasurer on:1.1. The most appropriate model for the operation of open banking in the Australian context clearly setting out the advantages and disadvantages of different data-sharing models.1.2. A regulatory framework under which an open banking regime would operate and the necessary instruments (such as legislation) required to support and enforce a regime.1.3. An implementation framework (including roadmap and timeframe) and the ongoing role for the Government in implementing an open banking regime.
  2. The recommendations will include examination of:2.1. The scope of the banking data sets to be shared (and any existing or potential sector standards), the parties which will be required to share the data sets, and the parties to whom the data sets will be provided.2.2. Existing and potential technical data transfer mechanisms for sharing relevant data (and existing or potential sector standards) including customer consent mechanisms.2.3. The key issues and risks such as customer usability and trust, security of data, liability, privacy safeguard requirements arising from the adoption of potential data transfer mechanisms and the enforcement of customer rights in relation to data sharing.

    2.4. The costs of implementation of an open banking regime and the means by which costs may be imposed on industry including consideration of industry-funded models.

  3. The review will have regard to:3.1. The Productivity Commission’s final report on Data Availability and Use and any government response to that report.3.2. Best practice developments internationally and in other industry sectors.3.3. Competition, fairness, innovation, efficiency, regulatory compliance costs and consumer protection in the financial system.

Process

The review will consult broadly with representatives from the banking, consumer advocacy and financial technology (FinTech) sectors and other interested parties in developing the report and recommendations.

The review will report to the Treasurer by the end of 2017.

NZ Reserve Bank outlines stance on cyber issues

The New Zealand Reserve Bank had thought about whether to introduce more prescriptive requirements in managing cyber security risks but decided not to at this stage.

A recent paper by the Committee on the Global Financial System (CGFS) and Financial Stability Board highlights that financial risk in fintech platforms may be higher than at banks due to greater exposure to digital processes. Some new fintech platforms rely on investor confidence for new business, so are particularly vulnerable to a significant operational risk event, including cyber-attack that may result in a loss of investor confidence.

Firms in the finance sector, regulators, and other authorities all have a part to play in managing cyber security risks while still benefiting from the opportunities of new financial technology.

“The dynamic cyber environment means organisations have to be nimble in their approach to cyber security – focused on outcomes, rather than prescriptive compliance exercises,” Reserve Bank Head of Prudential Supervision, Toby Fiennes, said in a speech delivered today to the Future of Financial Services conference, in Auckland.

He said that cyber-attack poses a significant threat to the global financial system, as shown by the ‘WannaCry’ ransom-ware attack that affected more than 200,000 systems around the world and the more recent ‘Notpetya’ attack.

“The nature and incidence of cyber risk is unique, meaning that typical approaches to risk management and disaster recovery planning may not be appropriate. While cyber vulnerabilities can be mitigated, the potential sources of cyber threats and the attack footprint are just too broad, so they can never be eliminated,” Mr Fiennes said.

“We doubt that prescriptive regulations would appreciably improve the outcome, when the technology and threat landscape are both changing so rapidly. We will, however, review this policy stance from time-to-time to ensure that it remains appropriate,” Mr Fiennes said.

“The Reserve Bank is closely watching the emerging wave of ‘digital disruption’ affecting the financial sector as firms react to customer demand for a more online experience. In the short term, digital disruption may result in new risks and increased instability in the financial system but in the long term, digital disruption of the banking sector may improve the efficiency of the financial system. The long-term impact on financial system soundness is less clear.

“We’re working with other agencies, such as the FMA and Ministry of Business, Innovation and Employment, to ensure that New Zealand presents an environment where digital financial innovation can flourish, provided it is done safely. In our view, New Zealand’s financial market regulatory settings support innovation and industry-based solutions and we see no need to actively steer potential solutions from industry by providing a concessionary environment for new entrants.

“As the prudential regulator, we’re looking at whether financial institutions appear to be taking cyber risks sufficiently seriously. We look to self-discipline and market discipline to provide the defences, agility and crisis preparedness that are required,” Mr Fiennes said.

 

ANZ is the first Big Four bank on both Samsung Pay and Apple Pay

From Business Insider.

ANZ has joined Samsung Pay, becoming the first of the big four Australian banks to be on all three major digital wallets.

The bank had already been the only one of the majors to be on Apple Pay and was already available on Android Pay.

“Samsung has strong device market share in Australia and many of our customers love its open approach to technology, so it made sense for us to work with them in bringing this convenient and secure mobile payments solution to our customers,” said ANZ product managing director Bob Belan.

ANZ joins Westpac and a range of smaller institutions on the Samsung platform, which allows contactless payments through selected Samsung smartphones and Gear smartwatches.

The Commonwealth, NAB and Westpac have resisted getting onto Apple Pay while they, along with some smaller banks, fought to negotiate collectively with Apple in order to gain access to the iPhone’s near-field communications (NFC) chip which would allow their own apps to make contactless payments.

Apple has denied the request, arguing access would be a security risk and accusing the banks of acting as a cartel to “free load” from its technology.

Meanwhile, former Google Australia boss and now ANZ digital banking head Maile Carnegie said in February that her company had no hesitation in joining Apple Pay.

“People were asking specifically for Apple Pay. They were asking specifically for Android Pay. And if that’s what they want, we needed to figure out the most pragmatic way of giving that to them,” she said at the time.

 “We could look back and say, ‘I wish that was us, I wish they wanted our digital wallet as much as they wanted [Apple Pay]’. But they didn’t.”

Belan also stuck to a similar line this week regarding Samsung Pay, citing customer demand.

“At ANZ, we believe our customers are best placed to make their own choices about which digital wallet works best for them,” he said.

The addition of ANZ now sees Samsung Pay have more than 40 Australian credit and debit card brands in its stable, along with more than 100 loyalty cards. Internationally the platform has more than 870 bank partnerships.