Let’s give the IMF some much deserved credit for last month’s carefully formulated gauntlet, gently erected in front of the financial services industry (see:  and CTMfile coverage). It’s a wide ranging assessment of how technology can transform the landscape, narrowing in on key areas of opportunity with a big dollop of dire need for change. One of the key sections reads, “Shortcomings of cross-border payment services are substantial. Cross-border transfers are costly, and cumbersome. […] services are opaque; the price paid for cross-border payments is not transparent, nor known at the time of initiating the transaction in most cases. […] sending money across borders is slow.”
As an institution charged with promoting international financial stability and monetary cooperation, navigating the narrow corridor between evolution and revolution is never easy. On this occasion, however, they’re looking to start a few fires. Reading between the lines, what the IMF are effectively saying is that our existing cross-border payment services are akin to the mobile phones of the late 80s. And we all know what happened there. The IMF’s solution to our brick-like payments infrastructure is FinTech, and rightly so. It’s a game changer.
Banking is about the future. Banks build lives, advance society and help countries thrive. Banks sit at the core of economic development, and easy access to efficient banking services, whether as an individual, or an enterprise, is essential for those contributing to a rich and diverse economy. Moving cash is what a bank does, and it should do it well.
The financial crisis of 2008 presented the regulators with some serious challenges. Banks had become too big to fail, moral hazard drove the system to breaking point, ultimately leading to capital and liquidity crises the likes of which had never been seen before. Eventually, coordinated and significant global action was taken to restore stability. And when the dust settled, regulators and central banks, realised greater levels of diversity and competition were required to help reinvent banking models to challenge the traditional models. Consumers were also looking for something that was quicker, simpler, and easier to use. Banking needed to change.
The emergence of cloud technology, the relative ease with which technology of all types could be deployed, and the availability of secure global networks combined with a rich catalogue of software, provided some of the bedrock for the development of FinTech as a movement. But that’s just one part of the story. More disruptive thinking was at play in the digital currency space. Advances in the application of cryptography allowed for the creation of something even more potent; a digital currency acting as a store of value, a general ledger and a payments platform.
Fast forward to 2017, and every part of the sector is being challenged. The IMF’s latest missive sets its sights on cross-border payments, heavy emphasis being placed on blockchain and digital currency technology, highlighting the potential to offer huge improvements and cost savings. The paper even goes as far as to suggest the opportunity for a central bank issued digital currency, making the need for domestic settlement redundant. And, it’s not as if the sector is limited for choice. Of the 800 or traded digital currency pairs, enterprise grade currencies, such as Ripple, are fast emerging as front runners to take on SWIFT headlong. Only this week, operating between Siam Commercial Bank, and Japan’s SBI Remit, it was announced that Ripple would power real-time remittance payments between Japan and Thailand. And Ripple is a digital currency.
The IMF also highlights opportunities in the compliance space. KYC, that persisting thorn in the side of the risk manager, has a target painted on its side. The paper is clear, highlighting how blockchain can be used to create and maintain inventories of standardised customer information, along with digital identities, allowing access to, and sharing of, customer information, globally. Solutions already exist. For example, the open source platform Tradle, is a full frontal assault on the challenge that is KYC.
Last week in block chain and digital currencies
And its against that backdrop, and in more general terms, it’s worth pausing to reflect on the last week in blockchain and digital currencies. For example, Daimler AG issued a €100 million corporate bond in a blockchain trial. This allowed the entire transaction cycle – from origination, distribution, allocation and execution of the loan agreement, to the confirmation of repayment and of interest payments – to be automated digitally through a blockchain network. Technical support was provided by a number of subsidiaries adopting the blockchain's cryptographic signature to prevent manipulation of transactions. On the digital currency markets, almost $2bn was traded in 24hours, in the top two pairs, Ether and Bitcoin. There’s a lot going on.
Whilst closer to home, I had the privilege of facilitating a digital currency workshop. A group of 40 were set the task of constructing a portfolio of digital currencies to support cross-border payments, cloud storage and smart contracts. They were provided with a trading blotter and required to execute a set of mock trades. I’m pleased to say they survived, calculated a P&L and left with their eyes wide-opened. The winners departed with something even more special, digital currency, transferred from a paper wallet to a digital wallet, instantaneously. And that really did open their eyes.
The IMF paper is well worth reading. It’s a balanced assessment of what’s possible, and pleasingly, doesn’t pull any punches. We need to embrace FinTech, and all that it offers. And quickly. Digital currencies are the next central bank of the internet and we are all way behind in our thinking.
 IMF STAFF DISCUSSION NOTE - Fintech and Financial Services: Initial Considerations - SDN/17/05
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