Posts by florapaterson

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Building Crypto Valley: Founder and CEO Johann Gevers at Sibos

November 1st, 2016 Posted by Crypto Valley, Cryptofinance technologies, Switzerland 0 comments on “Building Crypto Valley: Founder and CEO Johann Gevers at Sibos”

“Traditional fintech does not change the core functionality of the legacy financial system works they are merely increasing user friendliness. We need fundamental innovation. This is only done by cryptofinance; currently only a small part of the fintech ecosystem.”  — Johann Gevers

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Digital Legal Tender: The Foundation of Future Digital Trading and Finance

June 21st, 2016 Posted by Central Banks, Cryptofinance technologies 0 comments on “Digital Legal Tender: The Foundation of Future Digital Trading and Finance”

With the rapid increase of digital financial services, the urgent need for a central bank issued digital currency has become apparent in order to create inclusive, frictionless, and efficient national economies. A national digital currency will provide a  boost to economic growth allowing all financial service providers to participate and leverage their niche, while benefiting from unified global system.

Mobile money operators have made huge progress leapfrogging traditional brick-and-mortar banks providing digital financial services directly to users via mobile phones across underbanked regions such as Sub-Saharan Africa. Mobile money has done more to expand financial services in the past year than banking in the past decade.

With over 271 mobile money services now in operation, we are experiencing the same problem economies faced years ago before the existence of central banks. As the economy evolved from the exchange of fundamentally valuable assets such as gold, commercial banks began to issue their own private banknotes (based on deposits). Issues of interoperability arose – trust held in different institutions played a role in when and where your private bank note could be spent and interbank settlement was costly and problematic.

Central bank issuance of one national unit of account solved all these problems. Remove a five pound note from your wallet and you will read the fine writing – ‘I promise to pay the bearer on demand the sum of 5 pounds’, followed by the signature from the chief cashier of the Bank of England. This note is a bearer instrument – whoever physically holds it is assumed to be the owner of the property and the note is backed by our trust in the central bank.

Mobile money services are fragmenting national financial ecosystems through the issuance of private digital currencies – network specific tokens’ representing the national currency based on deposit accounts are issued onto their systems. These tokens are only tradable within the network they are issued into – in Kenya for example Safaricom M-Pesa customers can only transact with other customers of the same network. Any interoperable solutions that are arising are based on complicated technical bridging solutions between networks. Friction in the economy is occurring as the funds kept within these systems are not legal tender. They are not insured by the central bank and there is a systematic risk of loss. Certain methods of payment can only be used in certain places for certain things and a constant cycle of exchange between the digital world and physical legal tender exists.

There is a way to solve this problem – the same solution the central banks used years ago with the creation of physical legal tender. Central bank issued digital legal tender.

For conceptual purposes, the issuance, storage, and transacting of digital legal tender works in an identical manner to physical legal tender today (just safer and without the limitations of space and time). It provides one unit of account fully backed by the central bank, that can be utilized by digital financial service providers nationwide. Moving from multiple private issuers to a single issuer totally eradicates the need for privately issued ‘tokens’ and provides seamless interoperability between all systems.

Central Banks have been investigating this opportunity in the past year. On a macroeconomic level, the opportunity to take advantage of the digital economy whilst maintaining regulation and reducing costs is an undeniably attractive prospect.

The burden of managing an economy based on physical cash is heavy – a study by theFinance Ministry of Indiaestimated the cost of cash to the economy as 5-7% of the GDP in developing countries. The production, security, distribution, and eventual destruction of notes and metal coinage is expensive. Switching to a digital payment systems will reduce costs drastically whilst expanding the size of the formal economy through the provision of more accessible digital financial service offerings. The new found option for unbanked and underbanked individuals to forgo their reliance on physical cash (read here how cash based economies hits the poorest hardest) and enter the formal economy will reap large economic benefits for a country. A study by Tufts University estimates that in Mexico every 1% of the informal economy that is formalized represents US $560 million of new revenues with no change to tax rates.

In today’s fragmented digital systems, central banks are unable to keep track of the amount of privately issued digital currency in circulation. Digital legal tender will contribute to the ability of central banks to maintain security and stability within the national economy through execution of monetary policy in an efficient and targeted manner across all digital financial service providers. Furthermore, counterfeiting will be totally eliminated. The use of digital legal tender will create a more transparent system. Financial service providers can implement tiered AML/KYC regulations for domestic and international transactions offering far more reliable and complete identification than traditional paper-based systems.

It is clear that digital legal tender will not replace physical notes and coins completely in the near future. Central banks however must adapt and embrace the digital economy in order to fulfill important economic goals for growth and financial inclusion. Digital legal tender will move through the economy in a complementary manner to notes and coins. The emergence of cryptofinance technologies provides the ideal platform on which this new format of national currencies can be created and used in the most secure and efficient manner. I outline briefly the three key steps in the creation of a truly digitized financial system through the use of digital legal tender below:

1. Issuance: Central banks are the exclusive party to have the required software and hardware for the issuance of digital legal tender. The issuance process is identical to how physical money is issued today. Cryptographically secured, digital cash cannot be counterfeited. Digital legal tender enters the economy alongside, and in the same manner, as physical cash.

  1. 2. Storage: Digital legal tender is held by users in digital wallets exactly as cash is held in a physical wallet. Digital wallets hold bearer instruments (digital legal tender) directly on a mobile phone, can exclusively be accessed by the individual in physical possession, eliminate counterparty risk, and allow the user to be the sole party in complete control of their assets at all times.
  2. 3. Transacting: Legal tender is transacted between wallets in the same manner as physical cash today – directly from person to person with no involvement of financial intermediaries. Each transaction is a direct value transfer.

Disclaimer: Blog posts reflect the views of the respective authors, and do not necessarily represent the official view of Monetas.

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An Invisible Burden on the Poor – The Cost of Cash

May 24th, 2016 Posted by Cryptofinance technologies, Mobile money 0 comments on “An Invisible Burden on the Poor – The Cost of Cash”

Due to the extortionate costs of today’s digital financial services (specifically for low value transactions), cash is widely perceived as free, and thus used as a payment tool by the poorest individuals. This misconception must be addressed, and digital services must provide for those at the bottom of the pyramid who are suffering most from the hidden losses and costs associated with a life reliant on physical notes and coinage.

Cash is still king in the developing world. Despite the success of M-Pesa in Kenya, the average transaction size over this service remains at $27. Carrying high minimum fees, the most frequently occurring merchant transactions (under 1 dollar) would carry a transaction fee of up to 10% when executed digitally across these services.

Why? Costly and complicated legacy financial infrastructure render low cost transactions expensive for the operator thus expensive for the end user. With the exception of occasional larger value remittance transactions, digital financial services remain out of reach for the billions of people across the world living on $1-2 per day.

Looking at the impact of cash on individuals and society we can identify a number of key issues.

The sole reliance on physical cash locks an individual out of the formal and global economy, and the opportunities it presents. Individuals are hard pressed to finance a small business or purchase a vehicle because of the lack of a “digital history” that allows lenders to create a risk profile for lending. Savings are stashed under mattresses, at huge risk from theft. Even small household cash flow spikes can be disastrous because of the inability to safely store value. Informal community savings groups exist, however demand high re-pay rates and leave households vulnerable to loss. Even the most intelligent, entrepreneurial minded individual will be unable to step out of poverty without access to basic financial services.

Transactions in physical cash do not carry an immediately identifiable transaction fee. This has led to the common misperception that cash is free. Despite understanding the security risks of  carrying cash and the lack of access to financial services, the principal and least recognized downfall associated with cash is the actual losses and costs associated with accessing it.

Tufts University has conducted extensive research into the cost of cash across developed and developing economies. The results are clear – those hardest hit by the hidden costs of cash are the poorest.  In Mexico alone, the costs of access to cash represents around MXN 2.3 billion (USD 125 million) and 48 million hours of time every year. And furthermore, this number excludes all other means of loss associated with holding cash;  petty crime, loss, corruption, and the opportunity cost of cash not held in an interest bearing account.

For the poorest individuals the cost of travel and the time lost in reaching the cash access point is highest. An average Mexican loses around USD 1 per month. In the US, people spend 28 minutes per month accessing cash, with the lowest income individuals spending on average 5-10 minutes longer. Specifically those with no bank account or unemployed. This time and money lost travelling to and queuing at a cash access point, as well as paying the access fee results in a huge loss of productivity.

If these costs were to be calculated into a “cost per transaction”, it would become obvious that cash is clearly not the cheap option we all perceive it as. And certainly not for those who rely on it most heavily.

Furthermore, it is important to recognise the costs to the government. On a macroeconomic level, producing, securing, and distributing physical notes and coinage costs around 1–2% of GDP in developed countries, and 5–7% of GDP in developing countries. These costs may seem invisible but are in reality a huge burden on the economy.

Today, cash may be the cheapest option but it certainly isn’t free. Looking to the future of a cash lite society, we can identify three key steps that must be taken: the first is the significant reduction in transaction fees and provision of a service that can process true micro transactions digitally –  even less than $0.01. The second is the creation of a fully interoperable digital ecosystem through the central bank issuance of a national digital currency. Thirdly,  we must consider the use of an extremely efficient and secure technology that is able to power the transactions of entire national economies.

It is unlikely in the near future will see total eradication of physical cash, however the benefits associated with the introduction of a widely used digital payments systems will be huge: lowering the barrier to access financial services, stimulating financial inclusion, and adding huge value to a country’s economy.

Disclaimer: Blog posts reflect the views of the respective authors, and do not necessarily represent the official view of Monetas.

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CeBIT Global Conferences: An Interview with Johann Gevers, Monetas Founder and CEO

April 1st, 2016 Posted by Central Banks, Cryptofinance technologies, Mobile money 0 comments on “CeBIT Global Conferences: An Interview with Johann Gevers, Monetas Founder and CEO”

In this short interview, Johann discusses Monetas’ digital contracting technology and the benefits of creating Crypto Valley as a hub for digital finance.

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Startup-Corporation Collaborations: A Discussion with Vitus Ammann, Monetas and Penny Schiffer, Swisscom

April 1st, 2016 Posted by Cryptofinance technologies, Mobile money 0 comments on “Startup-Corporation Collaborations: A Discussion with Vitus Ammann, Monetas and Penny Schiffer, Swisscom”

Vitus Ammann, CMO and Penny Schiffer, Head of Innovation at Swisscom, discuss the impact digitization is having on large corporates. Together, Penny and Vitus highlight the difficulties corporations encounter keeping up with the rapid pace of digitization, and the benefits that come with a startup-corporation collaboration. It is clear that the innovative, agile, and visionary nature inherent to startups cannot be ignored.