Professor Michael Mainelli, Executive Chairman, Z/Yen Group, examines the key ways distributed ledgers are changing the payments industry. Michael is also taking part in the Oxford Union Debate at Payments International, as they discuss the idea: "this house believes blockchain is a truly transformative technology".
Payment providers took a while to discover cryptocurrencies. From the 3 January 2009 Bitcoin launch, at best it wasn’t till April 2013 (according to Google Trends) that interest rose. It took even longer for payment providers to discover mutual distributed ledgers (MDLs aka blockchains). These ‘multi-organisation databases with a super audit trail’ have existed for over two decades.
A contrarian view says that cryptocurrencies may not change payments. The two major mining-based systems, Bitcoin and Ethereum, have both forked. Both, so far, have exorbitant per transaction costs in terms of energy consumption, and both are rather slow. They have plans to improve, but aren’t yet capable of handling large payment volumes. Non-mining contenders, such as Ripple, have problems convincing people of their alternative architectures.
Does this slow awareness matter? Well, one might wonder what highly paid Chief Technology Officers do all day. The problem with payment providers having an obsessive focus on payments is missing the ancillary benefits, even if payments never move to cryptocurrencies. The fortunate thing is Bitcoin and others got attention. The unfortunate thing is that many proponents think cryptocurrency first. It’s a bit like discovering paper via paper currency. “I’d like to send you a message via a £20 note, so I’ll write on the corner. What if I take off the foil, the serial number, the fancy text? Gives me more space to write. Oh and the watermark to reduce the cost? Oh and increase the size. Hey, I have a piece of paper I can write on.” So where are the big changes MDLs might enable? Let’s touch on five:
Identity is perhaps the biggest problem area in payments. About 2.4 billion poor people worldwide lack adequate official identification, about 1.5 billion over the age of 14. They cannot ‘prove’ their existence to the satisfaction of society’s registries. While they certainly know who they are, they are excluded from property ownership, free movement, and social protection. They are more exposed to corruption and crime, including people trafficking and slavery. According to the International Monetary Fund in 2016, 75% of large banks, led by US and UK banks, have withdrawn materially from correspondent banking relationships due to concerns over money laundering fines, depriving developing countries of trade finance and remittances. MDL identity pilots (such as Z/Yen’s IDchainZ, www.idchainz.com) hold the promise of global private sector identity systems that might reverse this trend.
Anti-money-laundering and know-your-customer bureaucracy increases legal and regulatory costs and hassle for the wealthy. Some banks talk of up to 40% of customers declining to sign contracts for services when faced with the paperwork. Ninety percent of businesses responding to the International Chamber of Commerce’s 2016 Global Survey on Trade Finance pointed to anti-money laundering as the most significant impediment to trade. Extending from personal identity to corporate identity, MDLs again provide technology that can solve today’s problems whether or not payments move to cryptocurrencies.
3. Document and agreement exchanges
Document and agreement exchanges are just a step further. After hundreds or thousands of documents costing an importer or exporter tens to hundreds of dollars per exchange, payment providers proclaim they’ve knocked a few dollars off the payment transaction charge. Nice, but of the many tens, hundreds, or even thousands – think of a commercial vessel on an international voyage – of documents involved in trade, payment is only a fraction. Anywhere there is a pile of documentation standards, shipping and insurance leap to mind, MDLs have a potential role. Numerous trade experiments with MDLs are underway.
4. Beneficial ownership
Ultimate beneficial ownership is an area of increasing tension. Proving who is behind commercial transactions and that their motives are commercial is a looming trade nightmare. Tracking shareholdings and subsidiaries, direct and indirect ownership, independence, company groups, and varying definitions of ownership is another bureaucratic hell. Again, the idea of document and agreement exchanges providing this infrastructure has now moved into prototypes.
5. Initial cryptocurrency offerings
Initial cryptocurrency offerings (ICOs) are ‘foaming at the tokens’ as a form of crowdfunding, but they might presage a radical transformation of payments. ICOs consist of organisations offering tokens for future use in return for payment or ‘work’, e.g. mining. Depending on the offer, tokens can be (a) almost a substitute for shares where the system is the currency, e.g. Bitcoin or Ethereum, sometimes called a ‘token sale’, (b) the right of ownership or royalties in a project, or (c) an opportunity to have tokens in a token system that will be built to support a certain set of transactions, e.g. energy trading or gambling. Two things stand out. First, ICOs are trying to substitute token systems for many payment operations. Second, token systems might substitute for equities. People would go directly to a firm to buy equities, bypassing custodians, central securities depositories, central banks, central counterparties, correspondent banks, and commercial banks, let alone brokers.
Identity, documentation, and agreement exchanges may be the ‘killer apps’ for MDLs, but how will they evolve? I have an ‘ivy theory’ of technology based on decades of managing research and development. New technologies almost never ‘take out’ existing technologies. New technologies grow around old technology ‘trees’ and slowly choke them off. You wake up two decades later and wonder where the tree has gone. Think of mobile phones as one example. Payments may be a big technology tree, but MDLs are rapidly growing them.
Professor Michael Mainelli is Executive Chairman of Z/Yen Group and Principal Advisor to Long Finance. Michael’s book, The Price of Fish: A New Approach to Wicked Economics and Better Decisions, written with Ian Harris, won the 2012 Independent Publisher Book Awards Finance, Investment & Economics Gold Prize.