Posts by grahamtonkin


A SWIFT Response

September 22nd, 2016 Posted by Central Banks, Cryptofinance technologies 0 comments on “A SWIFT Response”

The SWIFT Institute recently published a working paper titled, “Virtual Currencies: Media of Exchange or Speculative Asset?” It examines whether or not virtual currencies–most prominently Bitcoin–posed a threat to macroeconomics or fiat currency.

The paper, however, illustrates the analysis of an innovative technology from the perspective of those with experiential bias mired in years spent in the industry and hinders the ability to see the “full picture.” In this brief, I will analyze some of the points brought forth by the SWIFT Institute and add the missing perspective needed to realize the full potential of this technology.

“An empirical analysis of prices and user accounts (wallets) of Bitcoin supports the theoretical result and finds that Bitcoin is mainly used as a speculative investment rather than a medium of exchange.”

Keywords: Bitcoin; virtual currency; digital currency; alternative currency; medium of exchange; asset class; safe haven”

Vocabulary is key to communicate anything and especially so when attempting to convey the specifics of such an innovative technology. Now, let’s talk about whyaccounts, virtual currency, and digital currency are misleading, or outright wrong when describing both the currency and technology of Bitcoin.

Digital (and virtual) currency has been around since the digitization of communication. Today, nearly all currency is digital; only a fraction of sovereign currency exists in the physical medium. Although Bitcoin is considered a digital currency, it is more accurately described as a cryptocurrency. Cryptography is what makes Bitcoin unique; it is where the differentiation between every other virtual or digital currency becomes apparent. Cryptography is what controls nearly every aspect of Bitcoin–from the production to the distribution. As there is no central entity or bank controlling the production of Bitcoin, one of the greatest values comes from trusting the math and not the centralized institutions’ policy decisions.

Referring to where one stores their Bitcoin as an account is akin to saying that you have a leather account in your back pocket or purse. A key differentiation between cryptocurrencies and digital currencies (the digital value held in your online checking account) is not the medium in which it exists, but instead the platform it exists on. Moving from a liability-based system (one which is based on account management) to asset-based (in the form of bearer instruments), trade has the potential to usher in even more substantial and advantageous differences.

An account is managed by a third party, a bank. A wallet holds value directly and is only accessible by the person who is in control of it. Although a seemingly inconsequential word choice, the reality of the difference is of crucial importance.

“Virtual currencies open up a new type of dual currency regime in which two currencies with no intrinsic value, virtual currency and fiat currency, coexist.”

Intrinsic value refers to the actual value of an asset based on an underlying perception of its true value. In terms of both tangible and intangible factors, intrinsic value is subjective and only determined by the value someone is willing to pay for an asset at a given time. How valuable is a glass of water to a man sitting in a boat in the middle of an alpine lake? How valuable is that same glass of water to that same man after being stranded in the middle of the Sahara for 4 days, without another glass in sight?

Value is based on circumstances. The authors of the paper are blinded by privilege and sit on top of crystal clear alpine lake, with more water to drink than is imaginable by most. Not only can they already complete their day-to-day transactions digitally, but they can access financial products custom made to fit their financial needs. Their investment portfolios are tailored to reduce risk and allow for steady growth over a lifetime, guaranteeing stability upon retirement. They make monthly contributions to different investments, automatically, based on the risk they want to assume and the return they seek.

This reality is a given for those privileged enough to be born in a geographic location with institutions in place. For the vast majority of humans, however, the possibilities of financial security are completely unimaginable. As of writing this article, there are 18 countries in Africa alone that have inflation rates over 7%. Financial services are not yet accessible to billions of people on earth, an opportunity that is many times greater than the userbase of Facebook.

There is intrinsic value in a technology that has the potential to help someone escape generational poverty, especially in countries where the national value evaporates at 7%+ per year.

The final point misidentified by the SWIFT Institute is the presence of a Central Bank Digital Currency. We’ve recently seen Adam Ludwin of Chain address over 100 central bankers at the Federal Reserve about why they should be racing to adopt new cryptofinance technologies. The World Economic Forum  states that there are working groups at 90 central banks around the world looking into the topic.

In July, the Bank of England (BoE) published a report on the macroeconomics of central bank issued digital currencies which fleshes out the pros and cons of central banks issuing their own digital currencies. The BoE concludes that there are numerous benefits, which you can read in detail in an earlier post.

Upon the introduction of a CBDC, the BoE predicts many consumers will switch from storing value in bank deposits to holding it in a digital currency.

This is the analysis that the SWIFT Institute should be conducting. When our assets and national currencies go digital, they will compete with their counterpart- liabilities. The digitization of legal tender will have widespread impact on macroeconomic conditions. Today’s financial services are liability and account-based. They require central switches, reconciliation between institutions, and plenty more on top of counterparty risk. An asset-based system changes all of this however, as people start transacting as they do with cash today, except in a completely digital medium that reduces costs to near-zero.

Bitcoin may not be a threat as a transactional medium to national currencies, but how will the digitization of national currencies impact fractional reserve banking and consumer deposits?

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

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Next Generation Digital Financial Services Will Drive Internet Use in Africa

August 30th, 2016 Posted by Central Banks, Cryptofinance technologies, Mobile money 0 comments on “Next Generation Digital Financial Services Will Drive Internet Use in Africa”

Last week, the Internet for All initiative by World Economic Forum (WEF) presented their objectives in Nairobi, Kenya. Over the next 3 years, they plan to incorporate an additional 25 million internet users in Northern Corridor East African countries (Kenya, Uganda, Rwanda, South Sudan) and bring total internet adoption to 70%.

The group determined to make this ambitious goal a reality by including stakeholders from Information and Communications Technology ministries, mobile network companies, hardware manufacturers, software and content producers, multinational NGOs, entrepreneurs and innovators. Their approach is to target broad sectors that are helping to drive demand for internet access and lobby infrastructure providers to help curtail high barriers to entry.

So, why is the WEF focused on increasing internet usage in countries that are also busy trying to increase food security, gender development, and basic healthcare?

Well, the internet is more than cat memes and a way to follow your favorite celebrity on Instagram. The internet democratises communication, education, and enables even the poorest and most vulnerable to be heard. Not long ago, information was held in libraries and universities. Only those with the privilege and means had the ability to access that information. The internet, however, opens the library doors and allows anyone to benefit from the knowledge humanity has created over thousands of years. Now, a girl in a remote village in Kenya can use her smartphone to stream a lecture at MIT to learn computer science and a mother in rural Uganda can learn about proper nutrition without have to spend money or time traveling to a health center to talk to a nurse.

The projects underway in the Northern Corridor are impressive. Many aim at increasing digital literacy across all segments of the population. To generate demand and gain awareness for those not yet connected, new programs teach students how to access the internet for things as simple as opening a social media account. A Facebook profile piques youth interest and teaches the value of the internet at a young age. The interest gained from gratification on social networks can be leveraged to learn job skills, e.g., software coding via gamification.

In a digital world, national borders dissolve and people become more connected. The global nature of the internet shatters location and geographic glass ceilings. As more citizens of the world learn to utilize digital skills, the ability to access education materials and make income from global sources becomes less of an ambitious goal and more of a reality.

The WEF released a favorable and forward-thinking report 2 weeks ago titled, “The future of financial infrastructure: An ambitious look at how blockchain can reshape financial services”. The key takeaways are very much in-line with the vision ofMonetas:

Distributed Ledger Technology (blockchain) is not a panacea. Instead, it should be viewed as one of many technologies that will form the foundation of next-generation financial services infrastructure.

Cryptofinance consists of many different technologies that utilize and complement different technologies in order to deliver an optimal final product for the end customer. The hammer isn’t the ideal tool for every job, and blockchain technology isn’t ideal for every user story. At the WEF, many people spoke about the use of  cryptofinance and blockchain tech in various cases from digital identity management to better sharing health records. Even though I was the only person in the room from the cryptofinance sector, I sat back and listened to an array of stakeholders speak about what is needed to allow for widespread uptake of digital financial services. The three factors consensually agreed upon were straight forward:

  1. Interoperability is vital. Today, users in most markets can’t send value from one mobile network to users of another. We need to unify financial service providers so users can send money to anyone they want, regardless of what bank or mobile network they use. Sending and receiving money internationally will also further increase usability.
  2. Low value payments must be able to be made at affordable levels. With 50% of payment volume taking place below USD 1 in Kenya, users today face fees in excess of 10%. With the inability to complete day-to-day transactions, all mobile money platforms today require users to immediately withdraw funds and leave the digital medium.
  3. Mobile money today barely qualifies as financial inclusion. Financial inclusion isn’t just payments; it’s financial products, savings, loans, investments, and more. Products like M-Shwari offered by MPesa are a start, but users only receive between 2%-5% in interest in a market with +7% inflation.

The speakers at the WEF who thought they were addressing mobile money needs were actually (perhaps not even to their own knowledge) describing the benefits of cryptofinance. It’s encouraging to know that a product our engineers have been making for the last 3 years fulfils these requirements plus much, much more. Monetas looks forward to further participation in working groups at the World Economic Forum to help drive awareness of the capabilities and benefits of cryptofinance amongst the stakeholders, central banks, and financial service institutions.


Bank of England Sees Potential of a Sovereign Digital Currency

August 15th, 2016 Posted by Central Banks, Cryptofinance technologies 0 comments on “Bank of England Sees Potential of a Sovereign Digital Currency”

In July, the Bank of England published a report on the macroeconomics of central bank issued digital currencies which fleshes out the pros and cons of central banks issuing their own digital currencies. It’s not often that we see these bastions of conservatism speaking out about innovation, but the technologies made possible by Bitcoin have created the toolbox that will allow a sovereign monetary policy to continue to flourish in our increasingly digital world.

The BoE report concludes that the issuance of a Central Bank Digital Currency (CBDC) could permanently raise GDP by as much as 3 percent–from a reduction in real interest rates, distortionary taxes, and monetary transaction costs. Their position puts forward an opportunity for central banks to digitally stabilize the business cycle within an economy.

The world’s financial institutions, which haven’t yet truly joined the digital revolution brought forth by the internet. Over the last century, our banking system has seen innovation, however, the technology it is built upon an antiquated foundation. Continuing to embellish outmoded technology is akin to attempting to increase the performance of a candle. If we had spent our time improving the candle, we would never have created the light bulb. Today we have the ability to start fresh and deliver incredible, new functionalities. With the near elimination of production, replication, and distribution costs, these functions are only possible in a digital medium. They will drastically reduce barriers to financial services and enable the transfer of value as simply and quickly as sending a WhatsApp message.

If you’re holding a paper note in your hand, you’re holding a contract between yourself and a central bank. The value held in your consumer checking account (or any other digital medium), isn’t cash in your possession. Depositing your cash into a checking account, you are lending your money to a financial institution. The number representing this amount in your online checking account is a promise from the financial institution that they will pay back the value which you have lent them. In this relationship, the bank is a trusted third party keeping your value safe. They have been doing this for thousands of years because it works for them. The model enables fractional reserve banking, which increases systemic risk and leaves consumers at the fate of the institution. Banks create new money and are only required to have a fraction (1/10th) of money lent in their physical reserves. If too many people withdraw money from their checking accounts, the bank will become illiquid due to the fact that most of their liabilities have been lent out in the form of debt. We’ve seen this problem countless times before, but most recently in Cyprus, Greece, and Kenya.

With a CBDC, anyone is able to safely hold and transact their wealth as if it were physical cash and without the necessity of a third party. The BoE sees tremendous benefits in this model which allows more base money to circulate in a economy and in turn reducing liabilities in commercial banks. With the ability to transact cash digitally, the need for reconciliation between financial institutions and their associated counterparty risks, as well as the capital required to insure these risks, can be eliminated. There is always the option for central banks to print more physical cash. However, banknotes require storage and a physical exchange for payment. Their very nature makes them expensive and impractical for a globally-connected and digital world.

Bank of America alone spends $1 billion a year to “shuffle paper (cash) around and transport money in armored trucks.”  While speaking at “The Future of Global Trade” event in Worms, Germany, I asked a crowd of 200 university students how many of them had been inside their bank in the last 6 months. No hands. Customer support? They do it online. Writing a check? That’s a thing of the past. It’s not only young people who have no need for a bank building. The infrastructure costs of today’s retail networks are so huge that they have raised the barriers to financial services to a level which excludes over 2 billion people worldwide.

Upon the introduction of a CBDC, the BoE predicts many consumers will switch from storing value in bank deposits to holding it in a digital currency. As consumers don’t keep their money in a checking account for the sole perk of a 2% annual interest, they may find greater value in keeping their money in their pocket. In the near future, commercial banks will be looking to the wholesale market to finance a growing portion of their banks. Relying on lending directly from central banks would reduce the spread between the wholesale interest rate on government bonds and that of consumer checking accounts. This offers central banks a more precise tool to better manage economic cycles.

With this report, it’s safe to say that there is now widespread attention paid by central bankers toward the possibilities of issuing their own digital legal tender. It will be intriguing to see the innovations brought forth by institutions best known for their obstinate conservatism. We’ve recently seen Adam Ludwin of Chain address over 100 central bankers at the Federal Reserve about why they should be racing to adopt new cryptofinance technologies. There are now working groups within central banks around the world looking into how it can happen and why it must happen.

In keeping with their history of intransigence, each central bank prefers to be the second to make a move. Who will be first? Innovations in emerging markets are already leapfrogging policy makers in mature markets. In East Africa, for example, policy makers have created an innovative fintech climate where friendly telco policies have lowered the barriers to financial services and demonstrated their commitment to foster a more inclusive economy. In Kenya, there is “an emerging pattern suggesting widespread systemic challenges: questionable governance practices, weak supervision and rampant fraudulent activities.” Kenya and countries like it are fertile ground for such inclusivity. Uniting all financial service providers–banks and the networks that offer mobile money–under a CBDC and reducing systemic risk, emerging markets are enabling their citizens to hold national currency directly and digitally in their pocket.

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


An Audience of Innovators. A Stage of Incumbents.

August 4th, 2016 Posted by Cryptofinance technologies, Mobile money 0 comments on “An Audience of Innovators. A Stage of Incumbents.”

The recent GSMA360 event held in Dar es Salaam, Tanzania highlighted the great progress in mobile tech on the African continent. With the world’s first global distribution platform now at the fingertips of hundreds of millions of Africans, companies–small and large–are delivering new tools that help add value and stability to people’s lives digitally. Companies are utilising mobile for a variety of cases: from digital health products, risk profiling and lending, to digital recruitment tools that aid growing enterprises perfectly match with prospective candidates. At the event, it was apparent that one thing was missing, however: a clear look towards the innovations of tomorrow.

Today’s digital revolution is changing the way we see and use technology and it’s changing fast. We have seen the cost of phones drop drastically allowing the long tail of the population to now find value in a device that until recently they didn’t even know they needed. WhatsApp managed to cut the predatory costs of the SMS message and allowed users to communicate globally at nearly no cost. Other tools, such as health applications, have seen their user base grow by millions while distribution costs drop. Now there’s no need to go visit a hospital hours away to ask a basic medical question. Other innovators in the room, such as, have solved a problem that local banks have been failing to do for a century: they can now create accurate risk profiles of unbanked customers. Collecting a wide array of data points across various mediums, including social media and phone usage, Branch uses machine learning to accurately assign a risk profile to be used in lending for someone with only a smartphone. Adoption has been rapid. Branch issued more than 70,000 small loans in their first few months of operation. To solve the age old problem of how to connect the labor market with companies looking to expand, Duma Works has connected over 3,000 candidates to 350 companies in East Africa via an innovative SMS platform that matches talent with employer.

These are examples of real progress. Presentations on innovation at GSMA360, however, were less than inspirational. A panel on the “Next Generation of Mobile Money,” focused on front-end changes and the need for regulatory support to better make things work. In regards to ecosystem development, the presenters believe it’s the responsibility of the operators to work together and increase the usability of mobile money platforms. At a time where we see Orange charging double digit fees to their customers for low-value transfers, it’s hard to imagine them innovating to the extent necessary to create the inclusive digital ecosystem that so far has been unachievable.

When asked about how a Central Bank issued Digital Currencies (CBDC) will impact mobile money, many incumbent presenters were unaware of developments that occurred in the last few years. Sagaciously, the impact investment fund Omidyar Networkexpressed interest in the subject and seemed to be making bold steps in the right direction with their financing of eCurrency, a company that develops software for central banks. The impact of a CBDC will solve the problems faced today in mobile financial services by reducing the transfer cost to a negligible level, allowing for $0.01 transactions, and facilitating global network agnostic transfers (a WhatsApp, for value). Most incumbents still see this as science fiction, but they are unaware that even theBank of England’s report on this exact subject determined–amongst the many benefits–a 3% uptick in GDP. Mark Carney, Governor of the Bank of England, is a strong proponent of this digital future. He recognizes its potential to deliver “a more inclusive financial system, domestically and globally; with people better connected, more informed, and increasingly empowered.” In addition, Adam Ludwin of Chain recentlyspoke on the subject at the Federal Reserve in Washington DC with over 100 interested central bankers; swift developments in this arena are already happening.

These technologies aren’t a dream of the future. Most people can’t imagine how fast things develop and the speed of which creative destruction occurs with the introduction of software. Ten years ago, there was no iPhone. Today, over 127 million Africans have a Facebook page. Watching a panel of established players is certainly compelling, however it is important to understand that their experiential bias can result in an underestimation of the speed and scale at which technologies and societal practices can change. GSMA360 offered attendees an enthralling insight into the current state of the industry, however, we can be certain that the incumbents on the stage will not be the sole drivers of our future digital financial services. Partnerships and collaboration with the innovators in the audience is vital.

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

A photo by Thom.

Traditional Mobile Money Wallets Aren’t Wallets, They’re Accounts.

June 22nd, 2016 Posted by Cryptofinance technologies, Mobile money 0 comments on “Traditional Mobile Money Wallets Aren’t Wallets, They’re Accounts.”

Wallets and accounts are two very different things. The leather wallet in my pocket is exclusively accessed by myself, and holds bearer instruments (physical cash) directly. My bank account however, is where I have entrusted my money to a third party- my bank.  That trust, is expensive. Not only the insurance of my deposit, but the amount of capital expended to insure the correct state of the ledger raises the costs of financial services, which in turn raise the barriers to entry.

Today’s mobile financial services use antiquated technology providing a simple digital interface with a centrally managed account being held by a bank or mobile network operator. We have seen tremendous success of mobile money in Africa, where users are able to digitize a once risky task; domestic remittance.

Mobile money today is far from financial inclusion. Currently, mobile money allows a user to dip their toes into financial services for the first time through the ability to transact high values digitally within a country, to a friend or family member who is also using the same mobile network.

Mobile money can not yet allow for true financial inclusion because of the antiquated system of central account management it is built on top of. What today is referred to as a ‘Mobile Money Wallet,’ is nothing more than an interface to access a centrally managed account via a mobile phone.

Centrally managed accounts are what we have used exclusively for financial services because, until now, we have always needed a trusted third party to complete transactions not taking place in physical cash. Banks have taken on this role for hundreds of years, and recently mobile networks have entered the scene. These centrally managed accounts are expensive because of the necessary backend support required to insure the correct balance and security of the account. Not everyone today realizes what an account actually is, and they don’t understand the value they see represented in an account represents only a promise.

An account balance is a promise. It’s a promise that the financial institution will return the value that the depositor has lent it.  We have seen this promise broken countless times in history, from sovereign crisis in Cyprus and Greece, to the devastation of 50,000 depositors at Chase Bank of Kenya just a few months ago. Deposit insurance, greater controls, and continual audits help to build trust and insure the safety of consumer deposits, but all add cost for the end customer and further raise the barriers to access financial services.

What if you could hold cash in a digital wallet, just like you hold paper cash in your leather wallet today?

One of the greatest advantages users of bitcoin have found, is the sovereignty of control and ability to be the sole party able to hold and transact value. When somebody holds a bitcoin, they hold a financial instrument that is conceptually similar to physical cash. As a bearer instrument, whoever is in physical possession, is the rightful owner. There are no centrally managed accounts, and holders of the cryptocurrency are the only ones able to access it.

Cryptocurrencies aren’t exclusively bitcoin, and new technologies have made it possible for central banks to issue legal tender exactly how they do today, but in a digital medium. Digital legal tender is extremely advantageous for central banks, and dozens have created working groups to investigate digital issuance to help lower the cost of printing, distributing, and securing money. China, Russia, England, and dozens of other central banks have looked at accelerating financial inclusion with digital national currencies.

This digital legal tender, which is equivalent to physical cash in every way except the medium which it is printed on, is able to take on favourable properties of cash without having to occupy the physical world.

A user is able to hold and transact digital cash directly, without the need for a trusted third party. This ability has the potential to change financial services at its core, and change the role financial institutions play today. The financial services paradigm shift brought forth by bitcoin and the blockchain is still not fully known. The ability to hold any digital bearer instrument directly, however, will change finance. A user’s wallet will hold a variety of financial instruments; cash, equity in a company, commodities, or even non-monetary instruments such as identification documents, school records, and driver’s licenses.

Because institutional risk is removed when a user is responsible for their own bearer instruments (just as it is when a person holds paper cash in their leather wallet), cost drops dramatically and the need for physical infrastructure diminishes as digital services are accessible anywhere a data network exists (which is already over 97% of global population coverage).

Mobile based banking will not be revolutionized by Apple Pay, Google Wallet, or even MPesa. No, those services simply offer an increased convenience to access legacy technologies which at their core are prohibitively expensive, complex, and require reconciliation between financial service providers.

Financial services will be revolutionised by the disintermediation of trusted third parties and the ability for value to flow like information is communicated today – digitally.

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


An Expanding Cryptofinance Ecosystem: Picking The Right Tool For The Job

May 2nd, 2016 Posted by Cryptofinance technologies 0 comments on “An Expanding Cryptofinance Ecosystem: Picking The Right Tool For The Job”

Although great for pounding nails, a hammer isn’t the best tool for every job. Just like the hammer, blockchain technology does some things very well, but isn’t ideal for everything.

If 2015 was the year of bitcoin, then 2016 is the year of the blockchain. The rebranding of the technology has helped propel it into the boardrooms of nearly every major financial institution, negating the negative stories associated with the early years of bitcoin.

What is a blockchain though? I find that after over a year of working in cryptofinance, still nearly nobody has a clear understanding of what the technology is, or what it does. It shows up on the cover of mainstream publications, it’s trumpeted by CEOs as the next big thing, and whispered about deep inside the windowless innovation departments by managers looking to deliver a hammer to whatever problem their CEO wants solving.

The blockchain is a public ledger of all Bitcoin transactions that have ever occurred. It’s constantly growing as transactions are made, and a new ‘block’ of transactions is added every ten minutes. Blocks are added to the chain in a chronological order, and every transaction ever made on the blockchain is identifiable from the very first. Each computer connected to the bitcoin network performs the task of validating these transactions, and are rewarded by doing so.

So what good is this ledger for financial institutions, insurance providers, and every other business looking to join the hype? How is it applicable to how business is done today? Well, the bitcoin blockchain is distributed, and allows for transactions to occur without a trusted third party (such as a bank) or having to even know the counterparty. The public ledger is incorruptible, as the ledger is held by every computer connected to the network, and agreed upon by participants. Banks and other institutions see the opportunity as much as they see the threat. The ability for anyone in the world to easily transact digitally with minimal counterparty risk makes one of their primary functions obsolete. I believe most financial service providers are starting to realise this, and after witnessing the creative destruction caused by the internet, want to adopt whatever it is that will insure their place in a digital future.

Banks understand what the technology can do, but most don’t fully understand the technology. This has led to the advent of ‘private blockchains’. These so called ‘private’ blockchains use the process native to bitcoin, while operated only by nodes which they control. This demonstrates that the core concept of technology isn’t understood — distribution. The security, resilience, and value of the bitcoin blockchain is all due to it’s distributed consensus.

Private blockchains are the result of trying to use a hammer for every job. They, like the intranet, will most likely disappear with time. Cryptofinance is more than just blockchains, it’s simply the convergence of financial technology and cryptography. The future of the bitcoin blockchain will not be to record every beer bought or to act as a global ledger for all transactions. There are a myriad of technologies under development right now that will help solve the shortcomings of the bitcoin blockchain. The bitcoin blockchain was never expected to be cheap, efficient, or fast. It is distributed, and distributed systems are nearly always less efficient than centralized ones. Because of this, blockchain technology will be used in parallel with other technologies.

The blockchain will be used for it’s strengths — security, resilience, and as an incorruptible database. Large transactions will occur on the blockchain, but it is likely that the majority of transactions will occur by other means which don’t require the expense of consensus from a globally distributed network of bitcoin nodes.

Which technologies will take on this role are yet to be known. What we do know is that consensus based technologies such as blockchains, are inherently too slow and expensive for an efficient widely-used transaction system. Therefore, a deterministic solution that has the ability to handle the required volume of transactions would allow for the perfect complement to a blockchain. While a blockchain can use its distributed consensus to maintain the correct state of the ledger, symbiotic technologies will be able to work in tandem to lower cost and increase efficiency.

The difficulty won’t only be creating these technologies; it will be in educating those intent on using a hammer to solve all of their problems that there are other better tools for them.

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


GSMA Releases the Mobile Money Industry Report – Current Limitations Identified Show Promise of Being Solved with Cryptofinance

February 19th, 2016 Posted by Cryptofinance technologies 0 comments on “GSMA Releases the Mobile Money Industry Report – Current Limitations Identified Show Promise of Being Solved with Cryptofinance”

GSMA has released their annual report detailing the progression made in the last 12 months of mobile money, and things appear to be going great. There are now 271 live mobile money services globally, and an estimated 411 million users as of December 2015. The growth is impressive, with a 31% increase over last years numbers, and no signs of slowing down.  GSMA paints a picture of ecosystem creation and highlights the need to enhance integration moving forward. With a 52% increase in mobile money services now offering cross-border remittance, the industry is starting to recognize the value of global connectivity rather than the domestically-limited platforms of today, initially designed, in part, to increase customer stickiness.

Interoperability continues to be the talk of the town, but is still burdened by one small complication – capitalism. Mobile Network Operators (MNOs) are being asked to build partnerships with competitors that will allow customers to send money from their mobile wallet on one network, to a customer using an alternative networks wallet. Comparing the problem to mature markets, it would be akin to only being able to pay a merchant that uses your same bank. The comparison makes the request seem quite justified. The GSMA insists that industry collaboration is critical for domestic interoperability.

The problem lies with the MNOs that have spent the last few years heavily investing in their mobile money offering, initially as a means to increase customer loyalty. In an environment where 99% of connections are pre-paid, customer retention is a serious problem. An MNO that made the investments – and were able to take a majority of the markets because of their effort –  would obviously be hesitant to open their platform and risk cannibalisation of business segments where they have seen tremendous growth in the last few years.

So how can regulators create an environment that favors the customer – allowing them greater choice of a provider based on both cost and performance?

MNOs issue value that is then traded on their closed system. I think the interoperability problem can be best analogized to the banking landscape before central banks. Before central banks issued national currencies, individual banks issued their own currencies. This, of course, created an issue of interoperability, albeit not the same issue of digital interoperability. The lack of a ‘standard’ and trusted currency created friction in the economy due to different bank currencies competing over trust, value, and convenience (amongst many other factors).

What a central bank currency allowed for, was the ability of customers to use the same unit of account that was a recognised standard and trusted by those holding it. Government was able to maintain control of monetary policy, and reduce other negative externalities (counterfeiting, inflation of bank currencies, etc.), while allowing people to conduct business easier as the greater population recognised the standard unit of account.

In a digital era, I believe we will soon see central banks doing the same for digital value. I won’t go into too much detail explaining the difference between the digital value represented in your online checking account and a cryptocurrency, but they are fundamentally different. A cryptocurrency is a bearer instrument, and whoever is in possession of it is its’ rightful owner. Alternatively, your online checking account is an “IOU,” meaning that the bank has ownership of the value but has promised to pay it back when you need it.

With the creation of a state cryptocurrency, users would be able to use mobile money as digital cash. Mobile money wallets could all compete on cost or various functionality (think investments, savings etc.), however the customer would be able to put money in any wallet he chooses regardless of the MNO or bank. A Franc is a Franc, and a Rand a Rand. The issue of interoperability dies when a standardized unit of account is created that has the ability to be held in any mobile wallet.

The issue of interoperability would quickly be solved by a state cryptocurrency, but that’s just the beginning. In future posts we will explore the impact on a wider scale, including the increase in functionality over today’s mobile money and a reduction in cost by an order of magnitude.