Category Archives: Digital, NEO, Open Banking, Open Finance

Walmart to launch fintech startup with partner Ribbit Capital

Bankingdive | Anna Hrushka | Jan 11, 2021

Walmart partners to launch stealth fintech

Summary:

  • Walmart is creating a fintech startup in partnership with venture capital firm Ribbit Capital, the big-box retailer announced Monday.
  • The new venture will "develop and offer modern, innovative and affordable financial solutions" to customers and employees, Walmart said.
  • "For years, millions of customers have put their trust in Walmart to not only save them money when they shop with us but help them manage their financial needs," John Furner, president and CEO of Walmart U.S. said in a statement.

The details of Walmart's new fintech startup are scarce. The Bentonville, Arkansas-based company did not disclose the name of the new entity, specific services or a launch date.

The retailer said the strategic partnership "will bring together Walmart's retail knowledge and scale with Ribbit's fintech expertise to deliver tech-driven financial experiences tailored to Walmart's customers and associates."

The startup will be majority-owned by Walmart and its board will include Furner, Walmart Executive Vice President and CFO Brett Biggs and Meyer Malka, managing partner of Palo Alto, California-based Ribbit Capital.

See:  Amazon, Walmart, the Secret Battle for FinTech Supremacy: Part II

Walmart said its plans to add independent industry experts to the fintech's board and build a management team of experienced fintech leaders. The company also plans to grow the startup through partnerships and acquisitions with fintech companies.

"When we combine our deep knowledge of technology-driven financial businesses and our ability to move with speed with Walmart's mission and reach, we can create and deliver financial offerings that are second to none," Malka said in a statement.

Walmart's intention to expand into fintech is not the first time the retail giant has made moves into the financial services space.

In partnership with Green Dot, the company already operates a prepaid debit card called Money Card, which customers can load with funds and use to make purchases.

Walmart said it will continue to serve customers through its existing financial services products, including Money Card, check cashing, money transfers, installment financing and its Walmart credit card.

Andrew Cosgrove, the former general counsel and chief compliance officer at LendingUSA, said he thinks Walmart's new fintech plans could mean the retail giant is looking to bring its financial services infrastructure in-house.

See:  How is Amazon disrupting the financial services sector?

"Green Dot owns all of the interface, the technology and the whole infrastructure," he said, regarding Money Card. "I think they feel like it would be more useful for them to build their own infrastructure, which is what most fintechs are doing."

Ribbit Capital's past investments in top-tier fintechs such as Affirm, Credit Karma and Robinhood also signal the retailer is setting itself up for a successful venture, said Cosgrove, whose former company, the challenger bank Upgrade, is also a Ribbit portfolio company.

"Ribbit Capital is a top-tier fintech investment venture capitalist," he said. "Malka is really well-versed in all areas of fintech. I believe that they're going to be well positioned to create a winning product, whatever the product might be."

Walmart's brick-and-mortar presence could also help the retailer win over the unbanked and underbanked, a demographic that has historically had trouble trusting financial institutions, including online-only fintechs, Cosgrove said.

"The fact that Walmart has bricks-and-mortar locations in many communities will go a long way in building that trust," he said.

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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

Digital Ethics Summit 2020 Day One- Lessons to be learnt from 2020

WiredGov | TechUK | Jan 11, 2021

Digital ethics summit 2020Summary of day one at techUK's Digital Ethics Summit 2020.

On Wednesday 9 December we kicked off techUK’s fourth annual Digital Ethics Summit. The overarching theme for day one of the Summit was lessons to be learnt from 2020. Through a series of keynote speeches, breakout sessions and plenary panels, our speakers from across industry, government, academia and civil society, assessed the role and effectiveness of the digital ethics debate during the critical events that occurred this year.

To kick start the day we were joined by the Minister of State for Media and Data, John Whittingdale. As part of his keynote speech the Minister set out Government’s ambition for the upcoming National Data Strategy and highlighted work that is already underway, starting with the publication of the Government Data Quality Framework. The Minister stressed that underpinning this strategy is public trust and highlighted the need to bring the public along in these important conversations. The Minister also recognised the importance of digital skills and highlighted government’s 13M investment in a bid to boost digital skills. The Minister finished by reaffirming the importance of collaboration between the public and private sector, as well as the need for the UK to remain active in the global debate on digital ethics.

Watch the Minister’s full session recording here.

In her keynote address the Information Commissioner, Elizabeth Denham reflected on the year, highlighting the accelerated adoption of many digital technologies and suggested we’d seen greater collaboration on privacy issues this year than ever before. During her keynote, the Commissioner provided three takeaways to consider as we enter the new year. First, that data ethics will continue to be a lexicon for these shared discussions. Second is a real need to focus on the people that are affected by data decisions and third is considering the role of data ethics boards.  The golden thread throughout each of these three areas is trust. When asked where she’d like to see more focus in 2021, the Commissioner said it comes down to doing more work for kids, including in areas of algorithmic decision-making.

Watch the Information Commissioner’s full session recording here.

Plenary session – Lessons to be learnt from 2020

In the Summit’s  first plenary panel session titled ‘Lessons learnt in 2020’ speakers included Maria Axente, Responsible AI and AI for Good Lead at PwC, Edwina Dunn OBE, Board Member at the Centre for Data Ethics and Innovation, Stephen Metcalfe MP and Co-Chair for the APPG on AI an Kay Firth-Butterfield Head of Artificial Intelligence and Machine Learning at the World Economic Forum. Building on the Commissioner’s keynote, Maria Axente added that we’re building on a strong foundation when it comes to businesses establishing ethics boards.

See:  Canada “AIMS” to raise the bar for AI development and use through standardization

It’s now key that businesses connect their various internal initiatives to see progress. Stephen Metcalfe acknowledged the impact of a current digital divide in society and suggested the need for a refreshed look when it comes to access of digital equipment. Ensuring we’ve got the right digital infrastructure in place, including access to broadband, will be key in 2021. Kay Firth-Butterfield agreed that we need to grow the infrastructure that supports wider adoption of AI to occur. Drawing on her own experiences, Kay highlighted that countries are starting to develop a better understanding of the work that needs to be done when it comes to digital ethics, with many countries learning from other’s experience. Finally, Edwina Dunn OBE, highlighted the work of the CDEI this year and argued the importance of balancing innovation and what we are allowed to do. As we create more data, the more we can do, she says, but does that mean we should do it?

Watch the full plenary session recording here.

Following the plenary session, the Summit broke out into three breakout sessions focusing on three key issues:

Fairness and equality – Data and technology and the fight against systemic discrimination

This breakout session was chaired by Jessica Lennard, Senior Director, Global Data and AI Initiatives, Visa. Panellists include: Ashleigh Ainsley, Co-founder, Colorintech, Brhmie Balaram, Head of AI Research & Ethics, NHSX AI Lab, Renée Cummings, Data Activist in Residence, The School of Data Science, University of Virginia & Community Scholar Columbia University, Dr Kanta Dihal, Senior Research Fellow & Principal Investigator, Global AI Narratives, Leverhulme Centre for the Future of Intelligence, University of Cambridge and Allyn L. Shaw, President & CTO, Recycle Track Systems and Founding Partner, Deed.Partners.

Whilst discussing some of the greatest challenges we’ve faced this year, Allyn L. Shaw highlighted that current data training sets are still not representative of underrepresented communities, and in addition, many of these communities don’t have access to technology, causing a cascading effect when it comes to fairness and discrimination.

See:  Banking Must Take A Stand On Tough Social Issues

On the topic of defining fairness, Ashley Ainsley preferred to approach this from an equality perspective. He asked- Who are the people responsible for creating algorithms and making decisions? What opportunities are there to have equitable input into those systems and challenge the decisions made? He stated that people should have the opportunity to get involved and influence from the beginning point of the process.

The public has become more conscious to the impact of AI this year, and Dr Kanta Dihal suggested that in 2020, naïve techno-optimism has become inexcusable. Brhmie Balaram commented that when we think of fairness, we must ask fairness for whom? As fairness will look different for different people. She also added that it’s not just tools but also the culture. What’s happening around the way rules are implemented and the way they’re able to be challenged? Renée Cummings highlighted the need to consider due diligence, duty of care and due process, when it comes to the application of data into any kind of system.

Watch the full session recording here.

Continue to the full article --> here

 


The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

Is Digital Banking Safe? Which is safer, Fintechs vs Incumbents?

Which?  | Chiara Cavaglieri | Jan 2021

online banking security ratingWhich? has rated 16 of the biggest UK banks on the security of their online banking systems. How does your bank's online security measure up?

Best banks for internet banking security With so much of our banking now done on our computers and smartphones, it's important that those services are secure. Every year, we rate the security of the online banking and mobile banking services from major banks and building societies. In our latest test, volunteers carried out a series of tasks, while a team of experts from cybersecurity firm 6point6 tested each bank's defences.

See:  Fintech & Cybersecurity: Key Risks and Solutions

The table below shows how 16 banks and building societies fared for the main factors we tested in September 2020.
The percentage figures illustrate how important that area of security was to the overall test score.

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

KABN North America and Liquid Avatar Unveils New Challenger Banking Program for Verified Self Sovereign Identity Users

KABN | Cara Buckspan | Jan 6, 2021

KABN Challenger Banking programABN North America launches the KABN prepaid Visa Card to support its Liquid Avatar users and provides online banking solutions with XTM Inc.

TORONTO, ON / ACCESSWIRE / January 6, 2021 / KABN Systems NA Holdings Corp. (CSE:KABN)(OTC PINK:TRWRF)(FRA:4T51) (the "Company", "KABN North America" or "KABN NA") (www.kabnsystemsna.com), a North American Fintech solutions company specializing in empowering individuals to manage, control and generate value from their biometrically-verified Self Sovereign Identity ("SSI") through its Liquid Avatar (www.liquidavatar.com) platform, announces today that together with fintech innovator, XTM Inc. (CSE:PAID), it will launch its KABN prepaid Visa Card and digital banking platform to support its partnered challenger bank initiatives in North America.

The partner managed platform will initially include a multi-currency and KABN KASH integrated account platform, connected to the KABN Visa Card, which has the capability to add additional 3rd party currency, investment, and other financial services solutions. These services will be available through the Liquid Avatar app, which provides users with a biometrically, verified, SSI solution allowing them to manage a wide range of verifiable credentials, online site and program access, and data permissions, putting control over personal data where it belongs - in the hands of its owners.

See:  KABN North America and Loop Insights Partner to Launch AI Driven Merchant and Consumer Rewards Programs, Secured by Biometrics and Blockchain

With all of the necessary approvals and partnership agreements in place, KABN North America will begin rolling out the program in Canada throughout the first quarter of 2021 and has plans to continue its card program rollout to the U.S. and other geographic regions subject to all necessary approvals. Users can sign up for their card through the Liquid Avatar app or by visiting (www.kabncard.com)

"We're excited to launch our challenger bank program, with XTM, as our first financial services offering, to those with a verified Self Sovereign Identity," said David Lucatch, CEO KABN. "Our goal is to power Liquid Avatar users and other partner program participants to be able spend a blend of traditional and digital currencies, like cash back balances from KABN KASH, while ensuring that they manage and control their identity, data and the respective value it creates."

KABN Visa cardholders will be able to enhance their spending power wherever Visa is accepted, online and in more than 200 countries and territories worldwide. They will be automatically enrolled in KABN KASH (www.kabnkash.com), a customized consumer experience where users can earn cash back on transactions with a growing list of over 250 brand name online merchants. Cardholders will also have access, through our managed partner programs, to a customized online and mobile banking experience that allows for integration to a host of unique value-based services and offers.

"KABN's unique business model creates opportunities to convert a growing number of qualified, authenticated users into active program participants," says Marilyn Schaffer, CEO of XTM. "This is our second initiative with KABN North America, as we recently joined their healthcare consortium to introduce our other program participants to the COVID-19 verifiable identity healthcare credential."

The challenger bank and Visa card offering come at an opportune time. According to a recent report from Payments Canada, entitled Canadian Payments: Methods and Trends 2020 (https://bit.ly/3b2M0l6), there has been a surge in electronic payments, representing about 77% of all transactions with debit cards making up about 28% of total payment volumes. Further key findings included that 86% of Canadians made online purchases in 2019, accounting for over $54 billion in values, with footwear and fashion representing over 50% of online purchases; 18% made in-app purchases and 15% made purchases from gaming consoles or Internet of Things (IoT) devices. There were over 540 million online transfers accounting for over $178 billion in value.

See:  NCFA OpEd: Canada’s Open Banking Consultations: Let’s Get it Done!

The report also looked at the impact of COVID-19 which indicates initially that while Canadians were spending less overall, there was an accelerated decline in the use of cash and an expected increase in the volume and value of e-commerce and online spending as more people shop from home and more businesses are expected to pivot to e-commerce in order to meet consumer demand and reduce overall costs.

As part of its onboarding strategy for the KABN prepaid Visa cardholders, KABN North America, via its Liquid Avatar verified self-sovereign identity platform, provides state of the art, "Always On" identity verification and validation services at no charge to consumers. This allows users to create, manage and control verifiable credentials to digitally prove their identity and provide access continuously without the hassle of needing to reverify time and time again to a growing list of online service providers, healthcare initiatives, and other value-based programs. In turn, validated users are qualified for unique and customized financial services and offers including the KABN prepaid Visa card, KABN KASH and other value-based opportunities, subject to permissions and necessary approvals

KABN North America is currently exploring further opportunities to expand the KABN Card program to the United States and other geographic regions as part of the KABN Network.

If you would like to join our mailing list and receive updates on KABN Systems NA Holdings Corp., please click here

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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

Fintech in Atlantic Canada

Fintech Confidential Issue 3 | Maria Pacurar & Alicia Roisman Ismach | Dec 29, 2020

Fintech in Atlantic Canada

The history of the financial services industry in Atlantic Canada goes back to the early 1800s with the establishment in 1820 of the first chartered bank in Canada, the Bank of New Brunswick, later followed by the founding in Halifax of two of present Canada's largest banks: Bank of Nova Scotia (1832) and Royal Bank of Canada (1864).

Today, Atlantic Canada is witnessing the emergence of a unique fintech ecosystem, powered by key communication infrastructure and deep expertise in back-office operations. Venn Innovation has identified over 100 financial technology startups, with products ranging from cybersecurity, blockchain, and machine learning to robotics process automation, AI and data analytics, that are bringing new life into the region while serving clients around the world. Atlantic Canada has been known for its quality of life and cost-competitive business environment, but now, during this global pandemic, the region has proven to be one of the safest places in the world, adding to these advantages the fast economic recovery of its companies.

See:  Fintech Acquisitions Show Sector Strength Despite Covid-19

Atlantic Canada has strengths that are clearly complementary to the financial industry and can support the growth of this high impact sector with intentional effort and focus, gaining a share of this growing global industry. In NB alone, back office operations of financial institutions, insurance companies and communications, employ some 18,000 people, representing $1.5B for the economy.

How we identify Fintech companies?

evaluate fintech companies

The fintech sector in Atlantic Canada includes, for example, leaders like Verafin, which launched in 2003 and raised $515 million in 2019, the largest tech funding deal ever in Canada, and emerging companies like ProcedureFlow, Oliver POS (which recently secured a seed financing round from European investors), and SnapAP, which recently partnered with Oracle and Sage.

Fintech companies in our region have unique characteristics that largely contribute to the competitiveness of the region: as the investment environment is different from places like Silicon Valley or Tel Aviv, these companies often do more with less; they tend to be very lean, have a resourceful team, be real-world problem-solving focused and, as a result, provide more customer-oriented value propositions. On the other hand, it is exciting to notice that we have a lot in common with many of the world's top fintech ecosystems. Compared to places like Singapore, Sydney, Tel Aviv and others, we have comparable technology, and a focus on non-local markets. The high-impact meetings with industry leaders and the warm reception our Atlantic Canada delegation was so fortunate to enjoy at Money2020 last year are clear testimony to our international attractiveness.

It's been exciting to see the evolution of these companies since then, including the meaningful progress of solutions like Black Arcs, which can simplify complex decision-making through its analytics platform for an array of customers, and Four Eyes Financial, which offers financial compliance software from the institutional level to end-users.

Of course, we have to focus on the next generation. Given the strong pool of talent in an array of functional areas coupled with a considerable influx of highly educated immigrants, excellent quality of life, affordable cost of living, natural beauty and, of course, the growing tech ecosystem, there is no doubt that Atlantic Canada will see an increased international appeal. But what about the future? Where and how are we getting our next generation of talent?

See:  Magnetic North: How Canada Holds its Own in the Global Race for Innovation Talent

The region’s 16 universities graduating nearly 18,500 degree holders annually and performing nearly 60% of the region’s R&D (more than $200 million annually) are an important driver in this innovation ecosystem. This fall, both the Faculty of Management at Dalhousie University and Venn Innovation partnered with Coopérathon, the largest Open Innovation challenge in Canada. Run digitally for the first time because of the restrictions imposed by the pandemic, this initiative now counts participants from coast to coast.

It is also encouraging to note that Dalhousie University started offering the only university fintech course in the region last year. The course focuses on understanding the landscape in which fintech companies emerge, grow and compete, and gaining practical experience by interacting with fintech companies and entrepreneurs from the region. Dr. Maria Pacurar works with undergraduate students from across the university to inspire the next generation of fintech leaders. She has also been collaborating with Alicia Roisman Ismach, of Venn Innovation and Atlantic Fintech. Their dream: build the next Singapore or Tel Aviv, but right here in Canada—on the East Coast.

Fintech Confidential issue 3 cover 1 - Catching the Wave: Capitalize on New Opportunities in Private Placements

This article appears as a featured article in NCFA's digital magazine, Fintech Confidential (Issue 3 Dec 2020). Click to read the latest thought leadership, insights and trends about Fintech in Canada:

Checkout NCFA's digital magazine, Fintech Confidential (Issue 3, Dec 2020) --> here

 

The impact of Covid on machine learning and data science in UK banking

Bank of England | By David Bholat, Mohammed Gharbawi and Oliver Thew| Dec 2020

Covid – a call for digital transformation

  • We conducted a survey of banks to understand the impact of the Covid-19 (Covid) pandemic on their use of machine learning (ML) and data science (DS).
  • The use of ML and DS by banks has remained broadly stable since the start of the pandemic, with the number of applications remaining the same or increasing.
  • Half of surveyed banks expected an increase in the importance of ML and DS for future operations as a result of Covid. However, only a third of banks said there was an increase in the number of planned or existing ML or DS projects.
  • We will continue to monitor these developments closely, and to support the safe adoption of ML and DS in financial services.

Overview

This article reports findings from a survey conducted in August 2020 of banks headquartered or operating in the UK. The survey sought to understand how Covid has affected the adoption and use of ML and DS. Half of the banks surveyed reported an increase in the importance of ML and DS as a result of the pandemic. None of the banks believe that Covid will reduce the importance of ML and DS for them.

See:  Magnetic North: How Canada Holds its Own in the Global Race for Innovation Talent

The fact that investment and interest in ML and DS has remained broadly stable, and has actually increased for some banks, is significant given wider market volatility and the economic downturn, which might be expected to constrain budgets for investment in innovation. This may reflect the nature of the shock, which has affected financial services less than other sectors so far. We will continue to monitor how these technologies are used, including their benefits and risks, and explore how we can best support their safe adoption.

Benefits for households, banks and the economy

ML and DS have wide-ranging applications in financial services, which can bring benefits to consumers, businesses and the economy. For example, many banks use ML and DS for anti-money laundering (AML) processes. In many instances, this has reduced the rate of false positives in money laundering detection with one large UK bank lowering its false positives by 70%. For consumers, this helps reduce the number of erroneously blocked or delayed payments. For banks, this frees up scarce resources and speeds up internal processes. For the economy as a whole, this can help banks and authorities more precisely identify illicit financial activity.

See:  CCAF Report: Global COVID-19 FinTech Market Rapid Assessment Study

ML and DS also have the potential to provide more inclusive and tailored products to consumers. For example, ML is already being used by banks and fintech companies around the world to analyse newer data sources (such as social media data) to provide risk assessments of individuals with limited credit histories, which might help underserved or unbanked customers access financial services. Some UK fintechs and banks are using new data sources for consumer and business risk assessments. This trend looks set to continue with one credit rating agency announcing plans to offer UK banks access to a broader range of transactional data for consumer credit scores, including money earned and spent, council tax payments, savings and investments, and subscription payments.

The impact of Covid on ML and DS in UK banking

To help us understand the impact of Covid on ML and DS in the UK banking sector, we conducted a further survey of Prudential Regulation Authority (PRA) regulated banks in August 2020. The survey focused on banks’ perception of ML and DS, as well as the resourcing for current and planned ML and DS projects (see annex for the survey questions).

post-covid research on ML and UK banks

Around 40% of respondents reported an increase in the importance of ML and DS for future operations, and a further 10% of banks reported a large increase. None of the banks reported a decrease in the importance of ML and DS. This is a striking finding that runs counter to the suggestion of some commentators that a new ‘AI winter’ might be setting in as a result of reduced investment budgets due to the economic impact of Covid or because pre-pandemic models may no longer be relevant. With the latter, this may be the case since the vast amount of training data required for ML does not account for recent societal and economic changes.

Continue to the full article --> here

 


The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

The Good, the Bad and the Ugly of Central Bank Digital Coins (CBDCs)

Paul Schulte | Schulte Research | Dec 21, 2020

CBDCs Good, Bad and Ugly

The good: inclusion, provenance and bank cleanup  

It is becoming clear to anyone with a window in their office that blockchain is now (finally!) emerging as a viable and pivotal technology. It was a long time coming and, as with all new technologies, the actual use case is far different from anything envisaged during its inception. The main drivers in the development of distributed ledger technology are central banks. And they do, in fact, see great benefits to Blockchain technology.

See:  Should the U.S. Government Create a Token-Based Digital Dollar?

These benefits include...

  • Independent identification and verification. The establishment of an identity confers ownership. Shockingly still, more than 1 billion people in the world do not have a conferred legal identity and about 2 billion have no financial history.
  • This creates provenance for everything: ideas, people’s bodies, property, data, relationships, and so much more we cannot conceptualize now.
  • The provenance constructs a whole new understanding of collateral and establishes the capacity to borrow against assets which, heretofore, were an uncounted part of human experience. This includes millions of hectares of agricultural land, millions of homes, and 2 billion people who are not in the banking system.
  • Blockchain, thus, guarantees mass inclusion — once provenance is established, everyone’s land, ideas, and homes become protected assets that can be borrowed against.
  • Finally, once newly empowered and financially integrated people start businesses, blockchain technology offers them smart and cheap contracts; expensive and business-killing middlemen are eliminated.
  • Whole new types of financial opportunities emerge and a new class of entrepreneurs is born, creating prosperity for millions of families and their communities.

There is another more subtle and complex — yet utterly simple — dynamic at play here. I have heard it from too many separate and independent corners of the investment community for it to be hearsay. The banks in the US, Europe, Middle East, and China are a mess. They need to be cleaned up after a 20-year Supercycle of mad lending. What if there is a plan afoot to roll out a new form of M1 in the form of digital coins from The Central Bank directly to the e-wallets of accredited entities or directly to people’s accounts so as to bypass banks altogether?  What purpose does this serve? It redirects the deposit liabilities of banks directly into people’s accounts in order to give those same banks time to deal with their bad debt.

In effect, digital coins will act as a “ring-fence,” turning banks into a large scale “asset management company” to clean up balance sheets. Incidentally, don’t expect the banks to sit by idly as they will want a piece of the “central bank crypto action.”

See:  Better to get it right than to be first with CBDC, says US Fed chair

In the meantime, the economy can function with digital money distributed directly to citizens.  Digital coins, in effect, become a substitute bank credit. Easing the pressure on bad debt and ensuring that bad banks can’t paralyze national economies. Ideally, it is done slow enough so as not to put too much pressure on asset prices.  We need to pay attention to how central bank coins (let’s call it  M1-b money) replace paper money and what financial applications (the new rails) are used to distribute M1-b directly to consumers. I contend that the chatter distinguishing wholesale and retail distribution will become irrelevant as the global banking system morphs from a fractional reserve system run by banks to a full reserve system run by a group of tech companies who manage the ‘electronic rails’ and ‘train stations’ by which the money flows from the government to the citizen.

 

The Bad: conflicts of interest and political blocs  

Now we get to the bad stuff. What I see playing out before my eyes is a general rebellion against the dollar. There is a growing global perception that the US hegemony has morphed from an enlightened Pax Americana to a hypocritical bully-ana; DC has been weaponizing sanctions (or outright invasion) “willy nilly” to punish countries who dare to question the dollar’s supremacy. I attended a European Central Bank Zoom conference last week and was alarmed to hear that CBDC now carries intellectual baggage of regionalism and “currency bloc” thinking. There is certainly a sense of FOMO (fear of missing out) as the Eurozone confronts its lack of an alternative to Libra and BSN. That’s fair. But the optimistic tenor of the discussion belies a confused attempt to create a CDBC Frankenstein’s monster to satisfy 18-19 countries (is it “Euro-first” or “Euro, first”). I heard a “don’t call us — we’ll call you” attitude when it comes to the creation.

See:  JP Morgan Veteran Daniel Masters Explains How Blockchain Will End Commercial Banks

At the same time, I was alarmed to hear about BUNA, the newest FOMO iteration of a CBDC in the Gulf States.  When pressed by interlocutors about why the Gulf States needed their own CBDC, the argument boiled down to sanctions. I am getting the sense that the CBDC’s elephant in the room is that each national bloc wants to be able to impose its OWN sanctions on its OWN perceived adversaries.  They do not want someone else to impose sanctions on them, ie Uncle Sam.  So, we have a world which is morphing into four blocks: Libra in the US; a many-headed-hydra in Euroland; BUNA in the Gulf countries; and BSN in Asia. Incidentally, there was a massive pushback to Libra among the European central bank folks. A representative from the Deutsche Bundesbank was especially unflattering about Libra: “We might give it a look sometime in 2025.” OUCH!

Second, the “bad” part of CBDC is the practical realization that central banks are, by nature, very conservative organizations. The joke goes that if you need a heart transplant, get one from a central banker because it has never been used. The slowness and institutional absence of imagination, technological or otherwise, means that a private sector partner is vital. Public-private partnerships are crucial to kickstart the process. Someone has to build the new digital rails! In the US, it seems that Libra has been tapped on the shoulder. In China, it is Red Date.

The Eurozone has the European Payments Initiative which will use the existing technology of 14 banks in 5 countries to build a private rail system (what could possibly go wrong?). For better or worse, the private sector is vital to work alongside central banks in order to create a speedy, flexible, and interoperable system of payments. So far, Red Date is further ahead than anyone. While Libra can rapidly create a system, there is still massive resistance to Facebook operating inside other countries as an “honest broker.” A company like Master Card might be a better candidate, but it seems that the political Rubicon has been crossed and Libra has been tapped.

See:  China’s digital currency app looks like Alipay and WeChat Pay

Lastly, there was a terrific presentation by a very senior member of the Banque de France on the politics of a digital coin. There is now yet another elephant in the living room (it seems that a herd of elephants is squeezing CBDC from all sides).  He was very clear about the priorities of central banks when it comes to new initiatives of any kind. ‘What is the order of priorities?”, he asked? “First is politics. Second is policy. Third is regulation. And fourth is the functional solution.” I think this explains why the evolution of agreed-upon terminology is so problematic. It explains why the functionality of the CBDC’s “rails and train stations” is too elusive.

The reality is that politics and national policy are far more important than the creation of clever solutions to glaring problems.  I have learned that money and power are always at the heart of fixing national problems. Find out whose money and whose power is working the levers behind the scenes and you will find the solution. The regulators will also slavishly follow this trend. For instance, all of Libra’s senior leadership will be in Washington DC. It will likely be located in Lafayette Square across from the White House. The new spokesperson has been hired from the FDIC. The new CEO came from HSBC and has a history as an undersecretary in the US Government.

Follow these breadcrumbs. It’s a matter of form over function. Investing with an eye toward finding companies with the best solutions rather than companies with the best political instincts or connections might lead one to pick the wrong horse.   This is why people may be grossly underestimating Libra.

 

The Ugly: Each CBDC bloc wants to decide who is a terrorist & who is a money launderer.

Now we get back to the point I made earlier about The Euro Central bank conference last week (Incidentally, not a single Asian central banker was invited, even though it had delegates from Canada, Mexico, Libra, Bahamas, Sweden, Finland, and Middle East. I have to add that the smartest guy in the room was, I thought, Tim Lane from the Bank of Canada). There was frequent discussion of the need to regain control over a sovereign state’s ability to impose sanctions.  Countries no longer want to play the game of guessing who will be the new best friend or enemy of the United States. And they certainly do not want to find themselves on the sanctions list.

See:  Fintech experts divided on form for U.S. central digital currency

If a country does land in the sanctions swamp, it is essentially barred from SWIFT and cannot transact in dollars. SWIFT is NOT a ‘society’ in Belgium. It is controlled by Politicians in DC and is executed through 5 banks in New York. The world has become increasingly wary of this arrangement and is seeking an alternative. Representatives from BUNA, ECB, and BSN have all made this same point loud and clear.

Second, countries also want to decide who is a terrorist and who is a patriot. It is easy to forget that the 56 “terrorists” who signed the Declaration of Independence in 1776 were ordered to be hanged by Great Britain. By 1781, they were hailed as patriots who created a new country.  (The US was not a country until 1789 — it took 13 years to get from rebellion to nationhood!). They say that the difference between a patriot and a traitor is a matter of timing.

Here we see the problem with dollar sanctions. At any time given time, the US gets to decide who is a terrorist and who is a patriot. Many countries are still very young and are in the painful and tawdry process of nation-building and establishing a national consensus. There is growing resentment about the US’ ability to take a snapshot of history and decide when nation-building must cease and restart again. The US’ gross history of international abuse ought not to be forgotten either. The 20th century is filled with the US overthrowing rightfully elected Democrats and replacing them with tyrants: Pinochet in Chile, the Shah in Iran, Arbenz in Guatemala, and so many more.

Third, countries want to have the freedom to decide who is a money launderer and who is a tax evader. This sounds absurd. Hear me out. Much of the clandestine activity of intel agencies are very often carried out with laundered money. Countries deem the activities of their intel agencies as essential to survival. If these activities are caught in a trap of “laundering,” the funds can be frozen by the US. Furthermore, some countries reserve the right for political or national security reasons to let some elites off the hook when it comes to tax evasion, money laundering, or hidden financial identities. Why should politicians in DC get to decide matters of sensitive national security of other nations in a simplistic “good versus evil” view of the world, especially when recent history has shown these judgment calls to be smeared with hypocrisy?

See:  Top US Banking Regulator Reveals Positive Cryptocurrency Regulation Coming in Weeks

So, the CBDC debate rages on. Let’s not think that it is solely about functionality or the issues being addressed. Power, money, and nation-building are first and foremost. Regulation comes a distant second.  And problems being solved are, unfortunately, last. The reason why the debate over CBDC has the hallmarks of the fog-of-war is because, as always, we’re having the discussion upside down: the solutions come last, politics come first. Welcome to the world of financial realpolitik.  It’s form over function — political form trumps practical function as these new digital rails are being built.

NCFA Fintech Confidential Issue 3, Dec 2020

This article appears as a featured article in NCFA's digital magazine, Fintech Confidential (Issue 3 Dec 2020).  Click to read the latest thought leadership, insights and trends about Fintech in Canada:

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