Using Credit Card Payments Data For The Public Good

Interesting post from the UK’s Office for National Statistics blog, which highlights the power of data analytics using anonymised  credit card payments data.

The intelligent use of data gathered by our leading financial institutions can result in faster, more detailed economic statistics.  Tom Smith describes how a joint event staged by ONS and Barclaycard illustrates the vast statistical potential of  anonymised  payments data.

“My job at the Data Science Campus brings many fascinating days as we work with organisations across government and the UK to unlock the power of data. One recent event particularly stands out.

Our experts from across ONS joined forces with analysts from one of the world’s biggest financial organisations to explore how commercial payments data could help tackle some of the UK’s biggest economic questions.

Following a successful knowledge sharing day at the ONS Data Science Campus, Barclaycard, which sees nearly half of the nation’s debit and credit card transactions, hosted a ‘hackathon’ at the state-of-the-art fintech innovation centre Rise. This brought together 50 economists, developers, data scientists and analysts to address three challenges:

  • How could payments data improve our understanding of regional economies?
  • Where could financial inclusion policies best be targeted?
  • How could we use payments data to create superfast economic indicators?

Over two days, the ONS and Barclaycard teams worked collaboratively – in some cases right through the night – to identify how the payments data could be used to improve our understanding of the economy. The traditional hackathon finish saw the teams ‘pitching’ their work to a panel of judges from across ONS and Barclaycard.

The winning team focused on building predictors and indicators that provide fine-detail information for trending economic changes. Even at this early stage of development, their work shows how bringing together card spending data and economic data held by ONS could improve the information available for policy & strategy decision makers to make timely economic decisions.

There is much work to be done to turn this demonstration into a working model. But one of the things that stood-out for the judges was the winning team’s roadmap for how to get there, including the development and data architecture needed for a successful prototype.

“We’re really excited to play a key role in helping to support a better understanding of UK economic trends and growth. The hackathon was a great event to harness the excitement and expertise created through our partnership with the ONS, and the winning teams have shown tangible evidence that payments data can indeed be used for public good.” – Jon Hussey, MD Data & Strategic Analytics, Barclaycard International

For the Data Science Campus, collaborations are all about knowledge exchange. They are an opportunity for us to access expertise in tools, technologies and approaches to data science from outside government, evaluate them in a safe environment, and share our learning across ONS and wider government.

It was inspiring to see the level of energy, drive and collaboration, and to pool ONS and Barclaycard skills into understanding how payments data can be used for public good. (And it is worth pointing out that no money changed hands and no personal data were involved. ONS is only interested in producing aggregate statistics and analysis.)

Our work with Barclaycard illustrates perfectly how the rich data held by partners outside government can improve our understanding of the UK’s economy. This is a key part of ONS’ Better Statistics, Better Decisions strategy, enabling ONS to deliver high quality statistics, develop and implement innovative methods, and build data science capability by tapping in to best practices wherever they may be.

A bubble? We don’t even know how to value Bitcoin

From The Conversation.

Bitcoin is a “speculative mania” according to the governor of the Reserve Bank of Australia. But it’s not so easy to say that Bitcoin is a bubble – we don’t know how to value it.

Recent price rises (close to A$18,000 in the past three months) may be too great and can’t continue. But the Bitcoin market is only just maturing as an investment and as a currency, and so it may still have room to grow.

A bubble is when the price of an asset diverges from its “fundamentals” – the aspects of an asset that investors use to value it. These could be the income that can be earned from a stock over time, a company’s cash flow, the state of a country’s economy, or even the rent from property.

But Bitcoin does not pay out profits (like shares) or rent (like property), and is not attached a national economy (like fiat currencies). This is part of the reason why it is hard to tell what the underlying value of Bitcoin is or should be.

In the search for fundamentals some have suggested we should look at the supply of Bitcoins in the market (which is regulated by the technology itself), the number of Bitcoin transactions through the market, or even the energy consumed by Bitcoin miners (the computers that validate transactions and are rewarded with Bitcoins).

Diverging from fundamentals

If we take a close look, we can see how the price of Bitcoin may be diverging from these fundamentals. For instance, it is becoming less profitable to be a miner, especially as the energy required increases. At some stage the cost may exceed the price of Bitcoin, making the network less worthwhile to both mine and invest.

Bitcoin may be the best known cryptocurrency but it is also losing marketshare to other cryptocurrencies, such as Ethereum and Litecoin. Bitcoin currently accounts for 59.4% of the total global cryptocurrency market, but at the beginning of 2016 it was 91.3%. Many of these other cryptocurrencies have more functionality than Bitcoin (such as Ethereum’s ability to execute smart contracts), or are more efficient and use less energy (such as Litecoin).

Government policy, such as taxation or the establishment of national digital currencies, may also make it riskier or less worthwhile to mine, transact or hold the cryptocurrency. China’s ban on Initial Coin Offerings earlier this year reduced the value of Bitcoin by 20% in 24 hours.

Without these fundamentals the price of Bitcoin largely reflects speculation. And there is some evidence that people are simply buying and holding Bitcoin in the hope it will keep rising in value (also known as Greater Fool investing). Certainly, the cap on the total number (21 million) of Bitcoins that can exist, makes the currency inherently deflationary – the value of the currency relative to goods and services will keep increasing even without speculation and so there is a disincentive to spend it.

Bitcoin still has room to grow

Many big investors – including banks and hedge funds – have not yet entered into the market. The volatility and lack of regulation around Bitcoin are two reasons stopping these investors from jumping in.

There are new financial products being developed, such as futures contracts, that may reduce the risk of holding Bitcoin and allow these institutional investors to get in.

But Bitcoin futures contracts – where people can place bets on the future price of stocks or markets – may also work against the price of Bitcoin. Just like gamblers place bets on horse races rather than buying a horse, investors may simply buy and sell the futures contracts rather than Bitcoin itself (some contracts are even settled in cash, rather than Bitcoin). All of this could lead to less actual Bitcoin changing hands, leading to less demand.

Although the rush to invest is apparently encouraging some people to take out mortgages to buy Bitcoin, traditional banks won’t lend specifically for that purpose as the market is too volatile.

But it’s not just on the finance side that the Bitcoin market is set to expand. More infrastructure to support Bitcoin in the broader economy is rolling out, which should spur demand.

Bitcoin ATMs are being installed in many countries, including Australia. Bitcoin lending is emerging on peer-to-peer platforms, and new and more regulated marketplaces are being created.

Many companies are accepting Bitcoin as payment. That means that even if the speculation dies down, Bitcoin can still be traded for some goods and services.

And finally, although the fundamentals of Bitcoin are still up for debate, when it comes to transaction volume through the network there appears to be a lot of room for growth.

It’s good to remember that people have been calling Bitcoin a bubble for a long time, even when the price was just US$35 in 2013.

In the end, this is uncharted territory. We don’t know how to value Bitcoin, or what will happen. Historical examples may or may not apply.

What we do know is that the technology behind most cryptocurrencies is enabling new models of value transfer through secure global consensus networks, and that is causing excitement and nervousness. Investors should beware.

Authors: Alicia (Lucy) Cameron, Senior Research Consultant, CSIRO;
Kelly Trinh, Data Scientist, CSIRO

The Future of Payments Is About Trust and Convenience

Payments is fast evolving from cash or plastic to digital. But as the universe of potential digitally enabled payment options proliferates, winners and losers will be determined not by simply fulfilling a payment instruction (now taken as given) but by the customer experience, and degree of trust.

New players, new platforms, and new devices. This transformation is discussed in a recent Inc. article, which I recommend. It nicely portrays the quantum of change and the dilemmas faced by incumbents. I reckon the payments revolution is less than 10% done!

It is safe to say that for every invention, innovation, or evolution that drives the modern world, we face a tradeoff of sorts. When we shift from a relationship-based economy to a transactional one, we gain efficiency and convenience while relinquishing privacy and some level of human interaction.

For the average consumer living in an age of convenience, missing parts of conversations during dinner with friends is worth the hassle-free experience of ordering a rideshare via our mobile app or pulling up a photo on Instagram as a reference point. Intrinsically, these things aren’t bad, but what it certainly means is that we (as both businesses and consumers) are placing our trust far beyond the locus of personal control, and into the hands of the the brands delivering products and services to us vis-à-vis technology .

Want to stay at a palatial estate off the coast of Italy? You don’t need to know a prince; you just need a profile on Airbnb, a credit card, and a mobile phone.

We need to look no further than the financial technology (FinTech) industry to understand how our collective move toward convenience will translate to a heightened trust for brands that can deliver us products and services in a secure, connected, meaningful way. As consumers require less cash and more credit across devices, payments innovation will evolve to accommodate this convenience-led consumer behavior.

In a recent conversation I had with author, BBC radio/podcast host, and Financial Times writer Tim Harford, he summed it up nicely: “Credit equals trust.” More pointedly: “Over the last one-hundred years, we’ve seen a slow evolution from a particular type of trust that occurred locally, to a broadening out…whereby more and more people are trusted to do more and more things.”

While credit cards were the first trend toward expanding trust beyond your local store or banker, the next several years will reach an entirely new level of trust as mobile-enabled, contactless payment methods reach wide adoption.

Drivers of payments innovation

According to Visa’s recently released “Innovations for a Cashless World” report, four main trends will drive both consumer behavior and brand payment technology decisions over the next several years: Continuation of cashless transformation driven by card to cloud, everything as Point-of-Sale, paying in messaging platforms, transactions without borders, and the rise of the API economy.

“The ideas and findings in the report shine a light on the macro trends that will define commerce in 2018,” said Shiv Singh, senior vice president of innovation and strategic partnerships at Visa. “As innovation continues to outpace itself year after year, the rise of a cashless economy accelerates as more people around the world adopt technology.”

Several findings from the report give keen insight into our future, while simultaneously reminding us that how we pay for things holds far-reaching implications for both consumers and businesses, both of which are being somewhat forced to change old, institutionalized behaviors:

  • By 2020, 70% of the world (more than 5 billion people) will be connected by mobile devices, facilitating the transition to a cash-free future.

  • By 2020, more than 20 billion devices will be connected to the Internet; and where there is Internet there is an opportunity to channel it to a point of sale.

  • With more users than the population of China, messaging platforms like Facebook Messenger will drive peer-to-peer payments forward as significant growth in this area is expected in 2018.

  • APIs expand the opportunity for innovation by enabling companies to focus on one link in the chain rather than owning an entire value chain.

Customer experience: the ultimate trust test

While technology is one aspect of payments innovation, managing customer expectations and the human aspects of traction and adoption is also a key component. Companies must get this right in order to deliver the right products and services over the right channels at the right price point.

A recently published report by Accenture Consulting, “Driving the future of payments: 10 megatrends,” reinforces several of the salient findings from Visa’s report, while emphasizing customer experience (CX) as one of the main drivers of how payments will either succeed or fail as we move into the next several years:

“As the payments universe expands, customer experience is becoming the prime competitive differentiator. The irony–and the danger–for traditional players is that customer experience is in the spotlight just as they are losing control of customers. Less touchpoints mean less opportunities to shine. So when companies have customers’ attention, they better get it right.”

Luke Williams, Head of CX at Qualtrics, adds: “Companies are being infused with technologies, creating simultaneous potential for internal risk and disruption of their competitors. The trend now is ‘programmable technology layers’ – where the technology is open and customizable.”

According to Williams, this allows a nimble firm to compete how it wants to without being limited by narrow, rigid technologies. The rise of API economy (as cited in “Innovations for a Cashless World”) is a direct result of this trend, where the mindset shifted to interoperability of products and features.

How brands integrate technology with core aspects of the customers’ experience becomes even more relevant, as machine learning and AI replace humans in many cases. This is not necessarily a negative thing, as long as the technology is being utilized to enhance the relationship with a customer: “AI represents the future of frontline customer service.” remarked Todd Clark, President and CEO of CO-OP Financial Services. “AI-driven chatbots (computer programs simulating human conversation) can handle a significant number of basic customer service questions, freeing up resources to focus on issues requiring more significant attention. This type of support also allows for shorter wait times on the phone and with in-person chat, and as the AI system earns more about the nuances of situations, it will gradually increase the accuracy and scope of its support capabilities.”

Williams adds: “Companies that are viewed as trustworthy, while creating delightful, differentiated customer experiences (often driven by technology), will enjoy significant gains.”

As we head toward 2020, what we will lose in personal connection and first-hand decision making we will gain in broader experiences, accessibility, and opportunity. In essence, we will break down borders and (for those fortunate enough to have access) create a self-actualized world whereby simple transactions, coupled with trusting relationships, can enable the most mundane tasks to luxury experiences.

Digital Disruption And The AU$

RBA Governor Philip Lowe spoke at the 2017 Australian Payment Summit and explored some of the disruption in the payments system, including falling cash transactions, an eAUD, electronic bank notes and distributed ledger systems.  He also said that a convincing case for issuing Australian dollars on the blockchain for use with limited private systems has not yet been made.

A clear lesson from history is that as people’s needs change and technology improves, so too does the form that money takes. Once upon a time, people used clam shells and stones as money. And for a while, right here in the colony of New South Wales, rum was notoriously used. For many hundreds of years, though, metal coins were the main form of money. Then, as printing technology developed, paper banknotes became the norm. The next advance in technology – developed right here in Australia – was the printing of banknotes on polymer.

No doubt, this evolution will continue. Though predicting its exact nature is difficult. But as Australia’s central bank, the RBA has been giving considerable thought as to what the future might look like. We are the issuer of Australia’s banknotes, the provider of exchange settlement accounts for the financial sector, and we have a broad responsibility for the efficiency of the payments system, so this is an important issue for us.

Today I want to share with you some of our thinking about this future and to address a question that I am being asked increasingly frequently: does the RBA intend to issue a digital form of the Australian dollar? Let’s call it an eAUD.

The short answer to this question is that we have no immediate plans to issue an electronic form of Australian dollar banknotes, but we are continuing to look at the pros and cons. At the same time, we are also looking at how settlement arrangements with central bank money might evolve as new technologies emerge.

As we have worked through the issues, we have developed a series of working hypotheses. I would like to use this opportunity to outline these hypotheses and then discuss each of them briefly. As you will see, we have more confidence in some of these than others.

  • There will be a further significant shift to electronic payments, but there will still be a place for banknotes, although they will be used less frequently.
  • It is likely that this shift to electronic payments will occur largely through products offered by the banking system. This is not a given, though. It will require financial institutions to offer customers low-cost solutions that meet their needs.
  • An electronic form of banknotes could coexist with the electronic payment systems operated by the banks, although the case for this new form of money is not yet established. If an electronic form of Australian dollar banknotes was to become a commonly used payment method, it would probably best be issued by the RBA and distributed by financial institutions, just as physical banknotes are today.
  • Another possibility that is sometimes suggested for encouraging the shift to electronic payments would be for the RBA to offer every Australian an exchange settlement account with easy, low-cost payments functionality. To be clear, we see no case for doing this.
  • It is possible that the RBA might, in time, issue a new form of digital money – a variation on exchange settlement accounts – perhaps using distributed ledger technology. This money could then be used in specific settlement systems. The case for doing this has not yet been established, but we are open to the idea.

So these are our five working hypotheses. I would now like to expand on each of these.

1. The Shift to Electronic Payments

An appropriate starting point is to recognise that most money is already digital or electronic. Only 3½ per cent of what is known as ‘broad money’ in Australia is in the form of physical currency. The rest is in the form of deposits, which, most of the time, can be accessed electronically. So the vast majority of what we know today as money is a liability of the private sector, and not the central bank, and is already electronic.

With most money available electronically, there has been a substantial shift to electronic forms of payments as well. There are various ways of tracking this shift.

One is the survey of consumers that the RBA conducts every three years. When we first conducted this survey in 2007, we estimated that cash accounted for around 70 per cent of transactions made by households. In the most recent survey, which was conducted last year, this share had fallen to 37 per cent (Graph 1).

Graph 1
Graph 1: Number of Cash Payments


A second way of tracking the change is the decline in cash withdrawals from ATMs. The number of withdrawals peaked in 2008 and since then has fallen by around 25 per cent (Graph 2). This trend is likely to continue.

Graph 2
Graph 2: Number of ATM Withdrawals


The third area where we can see this shift is the rapid growth in the number of debt and credit card transactions and in transactions using the direct entry system. Since 2005, the number of transactions using these systems has grown at an average annual rate of 10 per cent (Graph 3). This stands in contrast to the decline in the use of cash and cheques.

Graph 3
Graph 3: Transactions per Capita


The overall picture is pretty clear. There has been a significant shift away from people using banknotes to making payments electronically. Most recently, Australia’s enthusiastic adoption of ‘tap-and-go’ payments has added impetus to this shift. In many ways, Australians are ahead of others in the use of electronic payments, although we are not quite in the vanguard. It is also worth pointing out, though, that despite this shift to electronic payments, the value of banknotes on issue is at a 50-year high as a share of GDP (Graph 4). Australians are clearly holding banknotes for purposes other than for making day-to-day payments.

Graph 4
Graph 4: Australia – Currency to GDP


This shift towards electronic payments, and away from the use of banknotes for payments, will surely continue. This will be driven partly by the increased use of mobile payment apps and other innovations. At the same time, though, it is likely that banknotes will continue to play an important role in the Australian payments landscape for many years to come. For many people, and for some types of transactions, banknotes are likely to remain the payment instrument of choice.

2. Banks are likely to remain at the centre of the shift to electronic payments

In Australia, the banking system has provided the infrastructure that has made the shift to electronic payments possible. In some other countries, the banking system has not done this. For example, in China and Kenya non-bank entities have been at the forefront of recent strong growth in electronic payments. A lesson here is that if financial institutions do not respond to customers’ needs, others will.

At this stage, it seems likely that the banking system will continue to provide the infrastructure that Australians use to make electronic payments. This is particularly so given the substantial investment made by Australia’s financial institutions in the NPP. The new system was turned on for ‘live proving’ in late November and the public launch is scheduled for February. It will allow Australians to make payments easily on a 24/7 basis, with recipients having immediate access to their money. The RBA has built a critical part of this infrastructure to ensure interbank settlement occurs in real time. Payments will be able to be made by just knowing somebody’s email address or mobile phone number and plenty of information will be able to be sent with the payment. This system has the potential to be transformational and will allow many transactions that today are conducted with banknotes to be conducted electronically.

Importantly, the new system offers instant settlement and funds availability. It provides this, while at the same time allowing funds to be held in deposit accounts at financial institutions subject to strong prudential regulation and that pay interest. This combination of attributes is not easy to replicate, including by closed-loop systems outside the banking system.

However, the further shift to electronic payments through the banking system is not a given. It requires that the cost to consumers and businesses of using the NPP is low and that the functionality expands over time. If this does not happen, then the experience of other countries suggests that alternative systems or technologies might emerge.

One class of technology that has emerged that can be used for payments is the so-called cryptocurrencies, the most prominent of which is Bitcoin. But in reality these currencies are not being commonly used for everyday payments and, as things currently stand, it is hard to see that changing. The value of Bitcoin is very volatile, the number of payments that can currently be handled is very low, there are governance problems, the transaction cost involved in making a payment with Bitcoin is very high and the estimates of the electricity used in the process of mining the coins are staggering. When thought of purely as a payment instrument, it seems more likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions. So the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.

This is not to say that other efficient and low-cost electronic payments methods will not emerge. But there is a certain attraction of being able to make payments from funds held in prudentially regulated accounts that can earn interest.

3. Electronic banknotes could coexist with the electronic payment system operated by the banks

In principle, a new form of electronic payment method that could emerge would be some form of electronic banknotes, or electronic cash. The easiest case to think about is a form of electronic Australian dollar banknotes. Such banknotes could coexist with the electronic account-to-account-based payments system operated by the banks, just as polymer banknotes coexist with the electronic systems today.

The technologies for doing this on an economy-wide scale are still developing. It is possible that it could be achieved through a distributed ledger, although there are other possibilities as well. The issuing authority could issue electronic currency in the form of files or ‘tokens’. These tokens could be stored in digital wallets, provided by financial institutions and others. These tokens could then be used for payments in a similar way that physical banknotes are used today.

In thinking about this possibility there are a couple of important questions that I would like to highlight.

The first is that if such a system were to be technologically feasible, who would issue the tokens: the RBA or somebody else?

The second is whether the RBA developing such a system would pass the public interest test.

In terms of the issuing authority, our working hypothesis is that this would best be done by the central bank.

In principle, there is nothing preventing tokenised eAUDs being issued by the private sector. It is conceivable, for example, that eAUD tokens could be issued by banks or even by large non-banks, although it is hard to see them being issued as cryptocurrency tokens under a bitcoin-style protocol, with no central entity standing behind the liability. So, while a privately issued eAUD is conceivable, experience cautions that there are significant difficulties and dangers associated with privately issued fiat money.

The history of private issuance is one of periodic panic and instability. In times of uncertainty and stress, people don’t want to hold privately issued fiat money. This is one reason why today physical banknotes are backed by central banks. It is possible that ways might be found to deal with this financial stability issue – including full collateralisation – but these tend to be expensive. This suggests that if there were to be an electronic form of banknotes that was widely used by the community, it is probably better and more likely for it to be issued by the central bank.

If we were to head in this direction, there would be significant design issues to work through. The tokens could be issued in a way that transactions could be made with complete anonymity, just as is the case with physical banknotes. Alternatively, they might be issued in a way in which transactions were auditable and traceable by relevant authorities. We would also need to deal with the issue of possible counterfeiting. Depending upon the design of any system, we might be very reliant on cryptography and would need to be confident in the ability to resist malicious attacks.

This brings me to the second issue here: is there a public policy case for moving in this direction?

Such a case would need to be built on electronic banknotes offering something that account-to-account transfers through the banking system do not. We would also need to be confident that there were not material downsides from moving in this direction.

Our current working hypothesis is that with the NPP there is likely to be little additional benefit from electronic banknotes. This, of course, presupposes that the NPP provides low-cost efficient payments. One possible benefit of electronic banknotes for some people might be that they could have less of an ‘electronic fingerprint’ than account-to-account transfers, although this would depend upon how the system was designed. But having less of an electronic fingerprint hardly seems the basis for building a public policy case to issue an electronic form of the currency. So there would need to be more than this.

Among the potential downsides, the main one lies in the area of financial stability.

If we were to issue electronic banknotes, it is possible that in times of banking system stress, people might seek to exchange their deposits in commercial banks for these banknotes, which are a claim on the central bank. It is likely that the process of switching from commercial bank deposits to digital banknotes would be easier than switching to physical banknotes. In other words, it might be easier to run on the banking system. This could have adverse implications for financial stability.

Given these various considerations, we do not currently see a public policy case for moving in this direction. We will, however, keep that judgement under review.

4. Exchange settlement accounts for all Australians?

Another possible change that some have suggested would encourage the shift to electronic payments would be for the central bank to issue every person a bank account – for each Australian to have their own exchange settlement account with the RBA. In addition to serving as deposit accounts, these accounts could be used for low-cost electronic payments, in a similar way that third-party payment providers currently use accounts at the RBA to make payments between themselves. Some advocates of this model also suggest that the central bank could pay interest on these accounts or even charge interest if the policy rate was negative.

On this issue, we have reached a conclusion, rather than just develop a hypothesis. The conclusion is that we do not see it as in the public interest to go down this route.

If we did go down this route, the RBA would find itself in direct competition with the private banking sector, both in terms of deposits and payment services. In doing so, the nature of commercial banking as we know it today would be reshaped. The RBA could find itself not just as the nation’s central bank, but as a type of large commercial bank as well. This is not a direction in which we want to head.

A related consideration is the same financial stability issue that I just spoke about in terms of electronic banknotes. In times of stress, it is highly likely that people might want to run from what funds they still hold in commercial bank accounts to their account at the RBA. This would make the remaining private banking system prone to runs.

The point here is that exchange settlement accounts are for settlement of interbank obligations between institutions that operate third-party payment businesses to address systemic risk – something that is central to our mandate. A decision to offer exchange settlement accounts for day-to-day use would be a step into a completely different policy area.

5. New settlement systems based on distributed ledger technology and central bank money?

One final possibility is for the RBA to issue Australian dollars in the form of electronic files or tokens that could be used within specialised payment and settlement systems. The tokens could be exchanged among members of a private, permissioned distributed ledger, separate from the RBA’s Real-time Gross Settlement (RTGS) system, but with mechanisms for the tokens to be exchanged for central bank deposits when required. Such a system might allow the payment and settlement process to become highly integrated with other business processes, generating efficiencies and risk reductions for private business. As part of this, the tokens might also be able to be programmed and sit alongside smart contracts, enabling multi-stage transactions with potentially complex dependencies to take place securely and automatically. This seems to be the general model that some people have in mind when they talk about ‘putting AUD on the blockchain’, although other technologies might be able to achieve similar outcomes.

Whether a strong case for the development of these types of systems emerges remains an open question. We need to better understand the potential efficiencies for private business and why it would be preferable for such a settlement system to be provided by the central bank, rather than the private sector; why privately issued tokens or files could not do the job. We would also need to understand why any efficiency improvement could not be obtained by using the existing Exchange Settlement Accounts and the NPP.

We would also need to understand whether and how risk in the financial system would change as a result of such a system. It remains unclear which way this could go. On the one hand, these types of processes could use a very different technology from the current system, which is based on account-to-account transfers, so they could add to the resilience of the overall payments system. But there would be a whole host of new technology issues to manage as well.

New Mastercard Digital Platform Launched

Mastercard has announced a new platform (in the US initially) which issuers can offers to their customers called Assemble.  The first product allows millennials to manage money through a digital prepaid account, a mobile app and a payment card (virtual or physical).

Its a great example of the emerging digital tools aimed to build loyalty, by assisting customers with additional money management features, delivered digitally, as predicted in our Banking Innovation Life Life Cycle.

Mastercard is currently developing additional use cases to support prepaid programs for additional segments such as underserved consumers and microbusinesses, and the gig economy. Mastercard Assemble for Millennials is available now in the United States with other markets being targeted within the next year.

In our fast-paced lives, each one of us is juggling a lot – careers, relationships, social events, families, the list is endless. So why should we stress about banking and trying to manage multiple apps? Why not have one centralized, secure account to cover all of our banking needs? BigSpender

Mastercard has a new platform and product to do just that:

  • Assemble is a prepaid innovation hub that issuers and partners will offer to customers with holistic money management capabilities including checking balances, budgeting, setting savings goals and making near-real time payments to almost anyone in the U.S. with a valid debit card via a P2P service powered by Mastercard Send.
  • The first product available from Assemble is geared toward millennials and, along with the features above, offers consumers a simple, smart and safe way to manage money through a digital prepaid account, a mobile app and a payment card (virtual or physical).

“Prepaid is much more than just a way to safely store and use funds. It is a foundation to create new possibilities for consumers,” said Tom Cronin, senior vice president, Global Prepaid Product Development and Innovation, Mastercard. “This technology enables our partners to deliver best-in-class digital experiences today, as we work to address additional segments such as gig economy workers and underserved consumers and micro businesses.”

Mastercard Assemble not only bundles assets and services together but also enables these digital prepaid solutions to promote innovation, increase the speed to market, and provide customers with seamless and secure usage. Issuers and partners can choose to deploy a white-label version of the solution or to integrate specific functions into their current user interfaces through APIs.

While Mastercard Assemble for Millennials will be the first launch, the company is currently developing additional use cases to support prepaid programs for additional segments such as underserved consumers and microbusinesses, and the gig economy. Mastercard Assemble for Millennials is available now in the United States with other markets being targeted within the next year.

Australian Bitcoin Exchanges Now Must Be Registered

Last week, the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 was passed into law.  The new law, for the first time, regulates Australia’s growing digital currency sector. Similar measures are already in place in the US, Canada and the EU.

It amended the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 to:

  • expand the objects of the Act to reflect the domestic objectives of anti-money laundering and counter-terrorism financing regulation; expand the scope of the Act to include regulation of digital currency exchange providers;
  • clarify due diligence obligations relating to correspondent banking relationships and broadening the scope of these relationships; qualify the term ‘in the course of carrying on a business’;
  • allow related bodies corporate to share information;
  • expand the range of regulatory offences for which the AUSTRAC Chief Executive Officer (CEO) is able to issue infringement notices;
  • allow the CEO to issue a remedial direction to a reporting entity to retrospectively comply with an obligation that has been breached;
  • give police and customs officers broader powers to search and seize physical currency and bearer negotiable instruments and establish civil penalties for failing to comply with questioning and search powers;
  • revise certain definitions; and clarify certain powers and obligations of the CEO; and Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Financial Transaction Reports Act 1988 to de-regulate the cash-in-transit sector, insurance intermediaries and general insurance providers.

One important change was that operators of Australian exchanges for Bitcoin and other digital currencies will now need to register with the country’s anti-money laundering agency.

It also sets out the conditions under which they may trade.They must  identify and verify their customers, keep records of transactions, report threshold transactions and suspicious matters, and run an anti-money laundering and counter-terror financing program.

It is now a criminal offence to provide digital currency exchange services without being registered with AUSTRAC and penalties for non-compliance start from two years’ jail and/or $105,000 for failing to register. They go as high as seven years jail and $2.1 million in penalties for corporations and $420,000 for individuals for severe offences.


ASIC’s Fintech “Sandbox” To Remain Unchanged

ASIC has released a consultation paper  and a review of its regulatory sandbox, introduced in December 2016.


In the review ASIC proposes to retain class waivers known as the fintech licensing exemption, that allow eligible financial technology (fintech) businesses to test certain specified services without holding an Australian financial services or credit licence for up to 12 months. The exemption is subject to a number of conditions, such as client and exposure limits, consumer protection measures, adequate compensation arrangements, and dispute resolution systems.

The fintech licensing exemption is a world-first approach that allows eligible fintech businesses to test certain services for up to 12 months without an AFS or credit licence.

Outside of the fintech licensing exemption, many fintech businesses rely on exemptions provided under ASIC’s relief powers. They have provided a number of exemptions from the licensing requirement for offering certain types of products and services. This is because, depending on the nature, scale and complexity of the products and services offered, it is not always appropriate for a business to obtain a licence and meet all of the usual regulatory obligations. They have provided relief for ‘low value’ non-cash payment facilities, the provision of generic financial calculators, and some services for mortgage offset accounts.

ASIC had committed to reviewing its fintech licensing exemption following 12-18 months’ operation.

ASIC Commissioner John Price said, ‘by introducing ASIC’s fintech licensing exemption,we have given a range of fintech businesses the chance to test their ideas without needing a licence.’

‘Even in cases where interested fintechs have discovered that they were not able to make use of the fintech licensing exemption, we have found that its introduction has encouraged businesses to come forward and consider their other options that result from the flexibility in ASIC’s existing regime.’

ASIC’s current fintech licensing exemption allows eligible businesses to test specified services for up to 12 months with up to 100 retail clients, provided they also meet certain consumer protection conditions and notify ASIC before they commence the business.

To date, four fintech businesses have used the fintech licensing exemption. Relying on the exemption, one business tested its financial services (providing advice and dealing in listed Australian securities); two businesses are currently testing advisory and dealing services in deposit products; and one business is testing acting as an intermediary and providing credit assistance.

In addition, over a dozen fintech businesses have also contacted ASIC about using the fintech licensing exemption.The consultation period closes on 27 February 2018.

ASIC also launched their Innovation Hub in 2015, and has worked with 233 fintech businesses that cover the spectrum of fintech.


DigitalX Announces Plans In Key Cryptocurrency Exchanges

DigitalX Ltd, has announced today that the ASX-listed blockchain software and initial coin offering corporate advisory firm, is dipping its toes into cryptocurrency exchanges.

The Perth-based company has more than $18 million in liquid assets, including $5 million in cash, more than $10 million in bitcoin and about $2 million in ether, power ledger (POWR) and etherparty (FUEL).

The Board of DigitalX has initially approved the use of up to $1 million for the provision of market making services, offering both a buy and a sell price.

The company has begun a risk of cryptocurrency exchanges, with a focus on the Australian marketplace.

DigitalX will also utilise arbitrage trading to take advantage of mispricing across approved exchanges.

Market making will involve providing liquidity to both sides of the cryptocurrency market while maintaining a small open position in the asset being traded.

DigitalX will maintain bid and ask limit orders below and above the spot price. These orders are regularly cancelled and updated as the spot price changes.

The company says this strategy is expected to produce the best results when price volatility is high.

DigitalX says it doesn’t require an Australian Financial Services License to buy and sell the company’s digital currency on digital currency exchanges under the current regime.

“DigitalX has a strong track record dating back to 2014 as one of the leading liquidity providers in the Bitcoin marketplace, supplying wholesale Bitcoin liquidity to exchanges, commercial operators and institutions,” says DigitalX CEO Leigh Travers.

“We wound down our trading desk last year due to a lack of funding. However, our strong financial position, together with the appreciation in the value of Bitcoin, has allowed us to reignite this service.”

The company in June announced a $4.35 million investment from Blockchain Global Limited.

DigitalX decided to take $2 million of the investment in bitcoins rather than Australian Dollars.

At last report, the company held 453 Bitcoins. At today’s price of $US16,838, DigitalX’s holding would be worth $USD7.63 million.

The ‘utopian’ currency Bitcoin is a potentially catastrophic energy guzzler

From The Conversation.

The recent upsurge in the price of Bitcoin seems to have finally awakened the world to the massively destructive environmental consequences of this bubble.

These consequences were pointed out as long ago as 2013 by Australian sustainability analyst and entrepreneur Guy Lane, executive director of the Long Future Foundation. In recent months, the Bitcoin bubble has got massively bigger and the associated waste of energy is now much more widely recognised.

In essence, the creation of a new Bitcoin requires the performance of a complex calculation that has no value except to show that it has been done. The crucial feature, as is common in cryptography, is that the calculation in question is very hard to perform but easy to verify once it’s done.

At present, the most widely used estimate of the energy required to “mine” Bitcoins is comparable to the electricity usage of New Zealand, but this is probably an underestimate. If allowed to continue unchecked in our current energy-constrained, climate-threatened world, Bitcoin mining will become an environmental disaster.

The rising energy demands of Bitcoin

In the early days of Bitcoin, the necessary computations could be performed on ordinary personal computers.

But now, “miners” use purpose-built machines optimised for the particular algorithms used by Bitcoin. With these machines, the primary cost of the system is the electricity used to run it. That means, of course, that the only way to be profitable as a Bitcoin miner is to have access to the cheapest possible electricity.

Most of the time that means electricity generated by burning cheap coal in old plants, where the capital costs have long been written off. Bitcoin mining today is concentrated in China, which still relies heavily on coal.

Even in a large grid, with multiple sources of electricity, Bitcoin mining effectively adds to the demand for coal-fired power. Bitcoin computers run continuously, so they constitute a “baseload” demand, which matches the supply characteristics of coal.

More generally, even in a process of transition to renewables, any increase in electricity demand at the margin may be regarded as slowing the pace at which the dirtiest coal-fired plants can be shut down. So Bitcoin mining is effectively slowing our progress towards a clean energy transition – right at the very moment we need to be accelerating.

How much energy is Bitcoin using?

A widely used estimate by Digiconomist suggests that the Bitcoin network currently uses around 30 terawatt-hours (TWh) a year, or 0.1% of total world consumption – more than the individual energy use of more than 150 countries.

By contrast, in his 2013 analysis, Guy Lane estimated that a Bitcoin price of US$10,000 would see that energy use figure climb to 80 TWh. If the current high price is sustained for any length of time, Lane’s estimate will be closer to the mark, and perhaps even conservative.

The cost of electricity is around 5c per kilowatt-hour for industrial-scale users. Miners with higher costs have mostly gone out of business.

As a first approximation, Bitcoin miners will spend resources (nearly all electricity) equal to the price of a new Bitcoin. However, to be conservative, let’s assume that only 75% of the cost of Bitcoin mining arises from electricity.

Assuming an electricity price of 5c per kWh and a Bitcoin price of US$10,000, this means that each Bitcoin consumes about 150 megawatt-hours of electricity. Under current rules, the settings for Bitcoin allow the mining of 1,800 Bitcoins a day, implying daily use of 24,000MWh or an annual rate of nearly 100TWh – about 0.3% of all global electricity use.

Roughly speaking, each MWh of coal-fired electricity generation is associated with a tonne of carbon dioxide emissions, so a terawatt-hour corresponds to a million tonnes of CO₂.

So much energy, so few users

An obvious comparison is with the existing financial system.

Digiconomics estimated that Visa is massively more efficient in processing transactions. A supporter of Bitcoin, Carlos Domingo, hit back with a calculation suggesting that the entire global financial system uses about 100TWh per year, or three times as much as the Diginconomics estimate for Bitcoin.

As a defence, this is far from impressive. First, as we’ve seen, if the current high price is sustained, total annual energy use from Bitcoin mining is also likely to rise to 100TWh.

More importantly, the global financial system serves the entire world. By contrast, the number of active Bitcoin investors has been estimated at 3 million. Almost all of these people are pure speculators, holding Bitcoin as an asset while using the standard financial system for all of their private and business transactions.

Another group is believed to use Bitcoin for illicit purposes such as drug dealing or money laundering, before converting these funds into their own national currency. The number of people who routinely use Bitcoin as a currency for legitimate transactions might be in the low thousands or perhaps even fewer.

Shifting the whole global financial system to Bitcoin would require at least a 200-fold increase, which in turn would entail increasing the the world’s electricity use by around 500%. With the current threat of climate change looming large globally – this constitutes an unthinkably large amount of energy consumption.

Better alternatives to Bitcoin

The disastrous nature of Bitcoin’s energy consumption should not lead us to abandon the associated idea of blockchain technology altogether.

There are alternatives to the “proof of work” method of validating changes to the blockchain, such as “proof of importance”, which is analogous to Google’s page ranking systems. Projects such as Gridcoin are based on calculations that are actually useful to science. But these ideas are in their infancy.

For the moment, the problem is Bitcoin and how to deal with it. There is no obvious way to fix the inherent problems in its design. The sooner this collective delusion comes to an end, the better.

Author: John Quiggin, Professor, School of Economics, The University of Queensland

Bitcoin’s rise will have ‘disastrous’ consequences for the planet

From The New Daily.

The Bitcoin frenzy currently gripping the world is taking an unexpected toll on the planet – in the form of a carbon footprint almost as big as New Zealand’s.

And with the cryptocurrency’s astronomical growth showing no sign of slowing, this carbon footprint is likely to grow – prompting some commentators to warn of an “environmental disaster” in the making.

The culprit is Bitcoin ‘mining’, the little-understood process that both secures the existing Bitcoin system, and creates new Bitcoins.

This process, according to Digiconomist, is incredibly energy intensive, and is fed largely by China’s highly polluting, carbon-intensive coal-fired power stations.

These revelations come as the Australian Securities Exchange revealed it would be using the same technology used by Bitcoin – Blockchain – to run its system, the first stock exchange in the world to do so.

Writing in The Conversation on Monday, Professor John Quiggin said the rise of Blockchain itself should not be prevented, as there were other ways to use it that were not as energy intensive.

But he said that Bitcoin itself should be abandoned, describing it as a “collective delusion” with “massively destructive environmental consequences”.

Bitcoin’s rise continues

On Monday, the value of a single Bitcoin reached $A22,343, more than 20 times its value a year ago.

The unprecedented surge – offering massive returns on small investments – has proved irresistible to everyday investors, pushing more and more to buy the currency, and forcing its value into what many warn is bubble territory.

But a more sophisticated, select group – Bitcoin miners – is also  seemingly increasing, likewise attracted by the rocketing value of a digital currency that many called the gold of the 21st century.

How Bitcoin mining works

Bitcoin mining involves using a computer to solve a mathematical problem posed to it by the Bitcoin system.

When the computer solves this problem, it validates previous Bitcoin transactions, increasing the security of the Bitcoin system. In return for performing this service, the miner – as likely as not some teenager working from his or her bedroom in Shanghai – is rewarded in Bitcoins.

The video below attempts to explain the whole thing in simple terms (with questionable success).

As the video explains, Bitcoin mining requires a truly phenomenal amount of electricity – currently 32 terawatts a year, according to Digiconomist.

To put that in context, Australia uses 224 terawatts of electricity a year, while New Zealand uses 40, according to figures published by the US Central Intelligence Agency.

If Bitcoin were a country, it would be the 60th-biggest consumer of electricity in the world, ahead of 160 other countries. In other words, Bitcoin is becoming a significant contributor to climate change.

And the likelihood is it will get worse, for two reasons.

First, there is only a finite number of Bitcoins that can ever be mined. Currently around 17,000 have been mined. The limit is 21,000.

The closer we get to the 21,000 figure, the harder it is to mine Bitcoins. As a result the computer power required to mine Bitcoins increases, with the electricity used going up as a result.

(All this, by the way, puts a huge strain on miners’ computers.)

And second, as the value and profile of Bitcoin increases, the number of aspiring miners will also likely increase, further pushing up electricity usage.

Supporters of Bitcoin would like to see it become a global currency to rival the US dollar. But Professor Quiggins warned against this.

“Shifting the whole global financial system to Bitcoin would require at least a 200-fold increase, which in turn would entail increasing the world’s electricity use by around 500 per cent,” he said.

“With the current threat of climate change looming large globally – this constitutes an unthinkably large amount of energy consumption.”