Input from Readers

With not much new to report here, I did get some reader emails suggesting various articles that might be of interest to readers here. So below I have pasted in the links to those articles with a brief excerpt from each just below the link.

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The Guardian - How Big Tech is Dragging Us Towards the Next Crash


"In every major economic downturn in US history, the ‘villains’ have been the ‘heroes’ during the preceding boom,” said the late, great management guru Peter Drucker. I cannot help but wonder if that might be the case over the next few years, as the United States (and possibly the world) heads toward its next big slowdown. Downturns historically come about once every decade, and it has been more than that since the 2008 financial crisis. Back then, banks were the “too-big-to-fail” institutions responsible for our falling stock portfolios, home prices and salaries. Technology companies, by contrast, have led the market upswing over the past decade. But this time around, it is the big tech firms that could play the spoiler role."

Click here to read the full article in The Guardian

The Maghreb Times - Tunisia is First Country to Issue a Central Bank Digital Currency

"Tunisia has announced the launch of its digital currency, the ‘E-dinar.’ With this, the tiny North African country claims to be the first country to launch a central bank digital currency (CBDC)."

Click here to read the full article in The Maghreb Times

The Block - China's President wants Country to  Be Blockchain Leader

"China's President Xi Jinping said on Thursday that the country's communist party should regard blockchain as a core technology for important innovative breakthroughs and should commit to accelerating the development of the technology, according to a report from Xinhua.net."

Click here to read the full article in The Blockcrypto.com

BIS Report on Chinese "Shadow Banking"

Abstract

"Banks' shadow, or money creation by banks beyond traditional loans, plays an important role in China's money-creation process, posing a number of challenges to monetary policy operations and financial risk management. This paper analyzes the money-creation mechanisms of China's shadow banking sector in detail, provides accurate measurements, investigates its effects on financial risk, and surveys recent regulation. To strengthen supervision, China's regulators should closely track the evolution of various shadow banking channels, both on- and off-balance sheet. Specific macroprudential regulation tools, such as asset reserves and risk reserves, should be applied separately to banks' shadow and traditional shadow banking."

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My added comments: A thank you to readers for their input and forwarding the links to these articles. Always appreciate the help.

Added note: I like to include these kinds of stories when I see people doing good things to help out a neighbor. This one happened to take place right nearby us, but got some national attention. Enjoy:

https://twitter.com/LateNightSeth/status/1194668749967831040

Latest News Bites on Central Bank Currencies

The idea of central banks moving towards issuing their own "central bank digital currencies" seemed to be gaining a lot of momentum for awhile, but lately the idea seems to have taken a back seat. Below are links to a few news articles on this that provide some insight on various central banks activities related to central bank digital currencies.

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Bundesbank - Digital bank run a risk if central banks issue their own virtual currency

"The head of the Deutsche Bundesbank has warned of the risks to financial stability should central banks issue their own virtual currencies, including from a potential "digital bank run".

Click here to read the full article on Out-Law.com


Reuters - Chinese Think Tank - Central Banks Should Consider Using Digital Currencies

"Central banks should consider using digital currencies in cross-border payments that could cut transaction time and costs, researchers at the Chinese Academy of Social Sciences (CASS), a top government think tank, said in a report."

Click here to read the full article on Reuters

Reuters - Swiss Bank Has No Plan for Digital Currency

Meanwhile, it is obvious that central banks and governments are still struggling with what to do about private virtual currencies (if anything). For now, they seem to mostly be interested in just issuing warnings and statements of concern:

Independent UK - ECB Wakes up to Digital Currency Concern

Centralbanking.com - Polish Central Bank funds Youtube video to warn about digital currencies

And then we have some central banks trying to partner with digital currency:

Reuters - Saudia Arabia's central bank signs deal with Ripple

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My added comments: I think readers can see from these articles that the idea that we are on the verge of some new global reserve currency that everyone will be using in place of the US dollar is simply not reality. We have been reporting here for some time that things seemed to be going in the opposite direction as these articles continue to show.

This is why we have put a mid 2018 deadline here on this blog for something significant to happen that would justify ongoing regular articles regarding the replacement of our current monetary system with some new version based on something that replaces the US dollar. 

Until there is actual evidence that something like that is really happening, it is simply misleading to report otherwise. We'll continue to monitor events and watch for any hint of change. But for now, there is simply no evidence to report that we are on the verge of some kind a major change in the global monetary system unless some kind of new major global financial crisis emerges to force the issue. We'll continue to watch for that as well, but at some point there is no sense in continuing to write regular articles about such an event with no evidence to suggest it is on the near term horizon (even though it could arise at any time).

The biggest events we know of to keep an eye on at this time are what happens with North Korea and if there were to be some kind of major and sharp decline in the US stock market alongside a sharp further drop in the US dollar. In his latest article, Jim Rickards says we should also keep an eye on Turkey. Those are the kinds of events to watch for and what we monitor here. 

The horrific US debt situation should be causing more concern than it does, but so far no one anywhere seems to care about it. Who knows when or if that will change any time soon. Our lawmakers in both political parties just doubled down on policies likely to explode the debt even higher, so they obviously are not concerned. And US debt keeps selling just fine, so why would anyone care?

Beyond that, the US Fed just proved over the last several years that it stands ready to create the money to buy trillions of US bonds should everyone else decide to opt out. Perhaps this is why our political leaders are no longer all that concerned how much debt they run up? The markets seem fine with trillions in new central bank money to keep things running over at Treasury if need be.

Peterson Institute - China's Central Bank Backed Digital Currency

A thank you to Dr. Warren Coats for alerting me to this article on The Peterson Institute site. It says that the central bank in China is now ready to launch a central bank digital currency which would just be used as a replacement for cash. This would be the first major central bank to implement such a thing. Below are some excerpts.

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THE PBOC ANNOUNCES PLAN TO ISSUE ITS OWN DIGITAL CURRENCY

"While the Chinese government views digital currencies it cannot control as a threat, it wants to capture some of their benefits by embracing the technology underlying bitcoin without relinquishing control. The PBOC has been exploring issuing its own digital currency since(link is external) at least 2014. Ramping up this exercise in 2017, the bank set up small scale experiments(link is external) with mock transactions between it and commercial banks. But on January 27 of this year, the PBOC went much further into this experiment than many people expected.

In an interview(link is external) with Yicai, one of China’s leading business news publishers, PBOC Vice Governor Fan Yifei made a groundbreaking announcement detailing the PBOC plan for issuing a digital currency. There will be little to no resemblance to cryptocurrencies like bitcoin. It will remain centrally controlled and aim primarily to replace cash, rather than compete with bank deposits and other financial products. In effect, the plan allows China’s government to use digital currencies to increase control. Cash is virtually untraceable and can be transacted with no records, but the digital version replacing it will have “controllable anonymity.” The plan has clearly made strides not only on the technical side but also in the arguably more difficult process of obtaining consensus in a cautious political system and buy-in of banks. The plan could have a powerful effect beyond China, as other central banks learn from China’s example and ponder their own plans to issue digital currencies.

Much of the PBOC announcement focuses on the limited scope of the proposal, surely meant to reassure banks that their traditional functions will not change and that they will have a strong role to play in the digital currency. The crux of the proposal is to replace only cash (in monetary economic parlance: M0) with the digital currency, not bank deposits (M1 or M2). In a traditional financial system, cash and reserves represent central bank money (direct claims on the central bank). Bank deposits, though they are denominated in the same unit (say renminbi) as central bank money, are actually liabilities of commercial banks. This is a public-private partnership, where the central bank permits commercial banks to create money in exchange for submitting to its regulation. Some speculation has focused on whether central bank–issued digital currencies would upend this longstanding tradition by allowing individuals to have an account directly at the central bank(link is external) rather than rely on commercial banks. The PBOC says this will not be the case in China, and that it will aim to “avoid disintermediation.” In fact, Vice Governor Fan makes the insightful argument that bank deposits are already digital, making it redundant to make then digital once more. Cash is what is not yet digital."

. . . . .

                                                Assessment : Bold yet cautious plan

"The proposal is a bold, if cautious step towards issuing a central bank–backed digital currency. There are many technical details to iron out, and keeping a system with so much monetary value secure will be of great concern. I expect that other central banks will follow the Chinese example, starting only with a digital substitute for cash that allows for institutional learning and experimentation without requiring a fundamental rethink of money and monetary policy. That said, the limited scope will surely not last forever if the pilot proves successful. The trade-off between privacy and control will be one of the great political battlegrounds of the coming decades, and these currency experiments are sure to raise the urgency of these debates. Central banks like China’s that have built up trust and credibility over decades or centuries have little use for “mining” or other systems that allow one to put trust in computer code instead of in centralized institutions. Characteristics of the plan show that political authorities will try to capture some of the benefits of digital currencies like bitcoin to marginally improve their existing monetary systems and control, while eschewing the decentralized, mostly trustless ledgers that made bitcoin truly innovative."

Please click here to read the full article

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My added comments: Often I see articles on China that imply that China is about to issue a gold backed Yuan. However, this article which features actual PBOC plans, again illustrates that there is no indication that China plans anything like this anytime soon. Some have said that the PBOC will first implement a central bank digital currency and then later back that with gold. However, there is no mention of backing this central bank digital currency with gold by the PBOC. Instead, they talk in terms of a slow and cautious process of simply using it to replace physical cash.

Added news note: The US dollar bounced up a little but some expect it to keep falling

Express UK - BOE Could Introduce Bitcoin Style Digital Currency? Apparently Not

The Express (UK) runs this article which at first glance sounds like the Bank of England might be on the verge of issuing a central bank digital currency. This something we have covered here extensively so the article is of interest. 

However, when you look into the details in this article, it becomes clear that the BOE is not going to do anything like this any time soon. Below are a couple of quotes from the article and then a few added comments. (see added note below for latest update on this - BOE will not move forward with a central bank digital currency)

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"The Bank of England is investigating the possibility of introducing a bitcoin-style digital currency linked to sterling, according to reports. 

A new crypto-currency could be set up as early as 2018 and would transform the banking industry in Britain – possibly ending the need for high street banks.

A research unit at the Bank of England was set up in February 2015 to look into the possibility of a sterling-linked crypto-currency and a spokesman told the Telegraph it could report back within the next 12 months."

. . . .

"Despite looking into the possibility of launching a central-bank issued cryptocurrency, Dr Carney (BOE Governor) warned there could be financial stability risks if such an approach were rolled out across the whole economy through a cryptocurrency intended for the general public."

. . . .

“You (could) create a situation where you can have an instantaneous (bank) run. So as soon as there were any concern, people can switch in their account at the Bank of England,” Carney said.

Please click here to read the full article in Express (UK)

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My added comments: I will just list a few key points to consider on this topic below:

- please note that the article says it will 12 months before a research unit of the BOE "reports back" on this issue. That is not something about to actually be implemented. They say it will take another 12 months just to report back.

- BOE Governor Mark Carney repeats the concerns he and other central banks have about even doing this at all. Fed Governor Quarles recently said somewhat the same thing and indicated the Fed is in no hurry to do anything with a central bank digital currency. He talked about changes like this taking decades to unfold.

- please note the comment by Governor Carney that if central banks setup digital currencies that the public can own directly with an account at the central bank, it could setup the potential for "an instantaneous bank run" in a crisis where everyone tries to move their money to that account that would be directly backed by the central bank.

My own view on this is that all we seeing is a lot of articles trying to capitalize on the Bitcoin craze and trying to imply that major central banks are ready to counter this rise in Bitcoin interest by suddenly offering up their own versions of a digital currency. The direct input I get from people who work on this every day in the real world suggests otherwise. For one thing, this not something you can "suddenly" do in the real world.

I want to repeat what I have stated here many times. I have zero evidence that anything like this is about to happen any time soon based on direct input from experts I view as extremely credible. While this idea continues to be studied at central banks and the IMF, none of these entities have any kind of actual real world tested system they could actually implement at this time as far as I know. The only payments system in the world that has been able to implement a blockchain based ledger that could actually function inside the existing banking and central banking system (connect into it) that I am aware of is the one IBM announced earlier this year in partneship with KlickEx and Stellar. 

A central bank would have to have access to a functioning system like that one to actually implement this. I am not aware of any major central bank (or the IMF) announcing they have such a real world tested functioning system at this time. The best information I have at this time is that we might see a central bank such as Singapore test a central bank digital currency sometime in 2018 perhaps followed by some other smaller central banks. I don't believe any major central bank would move forward with this idea until they have a chance to observe it tested in the real world somewhere first. I will say that IBM and KlickEx can point to real world testing by KlickEx in the South Pacific for their system.

So, I doubt the BOE will implement a central bank digital currency in 2018. 2019 is the earliest I can imagine that really happening if they even to decide to implement one at all. There are many concerns such as the one Governor Carney mentions above that have to be resolved. If Bitcoin takes a huge dive in price in 2018 it would not surprise me to see this whole topic disappear as quickly as it has arisen in the media. Central banks could easily just put it all on the back shelf as well.

I would not hold my breath on the BOE issuing a central bank digital currency any time soon. China may be more likely to show up with one in 2018 than the BOE.
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Added note: After I wrote the above post, this article appeared stating that the BOE has decided not to go forward with implementation of a central bank "cryptocurrency" as the article puts it:

"The Bank of England has decided it will not launch its own cryptocurrency due to its possible impact on the financial system, according to FT Advisor. The bank began researching cryptocurrencies in 2015 and was considering launching its own cryptocurrency."

I decided not to delete this post as originally written but to leave it up as it very well illustrates what we have been trying to report here recently. That being that we should take all these articles about central bank digital currencies and blockchains with a grain of salt (Bank of Canada lukewarm on a CBDC). I do have information that suggests that we could see a central bank digital currency show up soon in Singapore. However, these major central banks like the BOE and the US Fed seem to have cooled off on the idea at this time as this new article reports. Original article on this is here on FT Adviser. 

Fintech Innovation - Where is it Headed?

We have clearly entered into a new world in terms of financial technology that is slowly but surely altering the landscape of banking, payments systems, and even perhaps legal tender currencies. All this technological innovation is filled with buzzwords and companies trying to become "the next big thing" that changes the world in a truly meaningful way.

We have "Bitcoin", "Blockchain", "Distributed Ledger", "CBDC" (Central Bank Digital Currencies) as new buzzwords that have popped up in recent years. Lately we see even newer efforts to try and innovate to improve "blockchain" (see Hashgraph here). I believe there are now over 1,000 private "cryptocurrencies" vying for capital in the marketplace. 

Right now there is so much happening so quickly in terms of competing ideas and technologies, it can quickly become overwhelmingly confusing to most people who are not technological experts and just want a simple, inexpensive, and secure way to transact their business with a currency that holds it value over time. 

We have covered this topic pretty well here, but as it can be quite confusing and things keep changing constantly (funny how innovation works that way), I thought perhaps an analogy that most people can relate to might be helpful to see where things stand right now. With that in mind, let's use the old Sony Betamax vs. VHS technology battle as our guide. 

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Readers from my generation will quickly recall this technology battle. Younger readers might find it an interesting footnote in history that illustrates how there is a constant technological struggle to gain universal adoption that really never ends. Even in this case, after the VHS technology for video players won out in the marketplace, it was eventually replaced by DVD's, then Blue Ray etc. But perhaps this process can help us understand the ongoing technology battles in the fintech arena?

First, here is how the Betamax vs. VHS battle played out as described in this wikipedia article on the topic:

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Videotape format war

"The first video cassette recorder (VCR) to become available was the U-matic system, released in September 1971. U-matic was designed for commercial or professional television production use, and was not affordable or user-friendly for home videos or home movies. The first consumer-grade VCR to be released was the Philips N1500 VCR format in 1972, followed in 1975 by Sony's Betamax. This was quickly followed by the competing VHS format from JVC, and later by Video 2000from Philips. Subsequently, the Betamax–VHS format war began in earnest. Other competitors, such as the Avco Cartrivision, Sanyo's V-Cord and Matsushita's "Great Time Machine" quickly disappeared.

Sony had demonstrated a prototype videotape recording system it called "Beta" to the other electronics manufacturers in 1974, and expected that they would back a single format for the good of all. But JVC in particular decided to go with its own format, despite Sony's appeal to the Japanese Ministry of Trade and Industry, thus beginning the format war."

. . . .

"Sony had met with Matsushita executives in late 1974 or early 1975 to discuss the forthcoming home video market.^[6] Both had previously cooperated in the development and marketing of the U-Matic video cassette format. Sony brought along a Betamax prototype for Matsushita's engineers to evaluate. Sony at the time was unaware of JVC's work. At a later meeting, Matsushita, with JVC management in attendance, showed Sony a VHS prototype, and advised them it was not too late to embrace VHS "for the good of the industry" but Sony management felt it was too close to Betamax production to compromise."

Outcome

"The main determining factor between Betamax and VHS was the cost of the recorders and recording time. Betamax is, in theory, a superior recording format over VHS due to resolution (250 lines vs. 240 lines), slightly superior sound, and a more stable image; Betamax recorders were also of higher quality construction. But these differences were negligible to consumers, and thus did not justify either the extra cost of a Betamax VCR (which was often significantly more expensive than a VHS equivalent) or Betamax's shorter recording time.

JVC, which designed the VHS technology, licensed it to any manufacturer that was interested. The manufacturers then competed against each other for sales, resulting in lower prices to the consumer. Sony was the only manufacturer of Betamax initially and so was not pressured to reduce prices. Only in the early 1980s did Sony decide to license Betamax to other manufacturers, such as Toshiba and Sanyo.

Sony's decision in 1975 to limit Betamax's maximum recording time to one hour (for NTSC systems) handicapped its chances of winning this marketing war. VHS's recording time at first release (1976) was two hours—meaning that most feature films could be recorded without a tape change. It was not until the early 1980s that Betamax offered recording times comparable to VHS. In UK, the L-750 Betamax tape lasted 3 hours and 15 mins, while VHS was limited to a 3-hour maximum (The E-180), though later on an E-240 tape lasting four hours became available, though picture quality wasn't as good.

By the time Sony made these changes to their strategy, VHS dominated the market, with Betamax relegated to a niche position."

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So, how can we relate this old technology battle to what we see going on in Fintech today? I think in a number of ways. 

 As with most technology battles, what is being sought is a universal standard that everyone can easily use and will want to use. Before a universal standard is adopted for anything, there are usually competing versions of new technology vying to become the universal standard. Once most manufacturers pick what they want, one technology tends to "win out" and become what everyone adopts. Sometimes it matters less which technology is actually "superior" than it does which one gets adopted by the most manufacturers. Once a critical mass of adoption takes place, the standard become accepted across the board.

Applying this idea to the new banking and currency technologies we see just about everywhere now, I think we are in the process of seeing which innovative technology will gain the broadest adoption by the key "manufacturers" in this arena. In this analogy, I think the major banks and central banks are the "manufacturers" because whatever most of them adopt is more likely to become the global "standard".  The general public (as always) will have the final say because whatever end "financial product" is adopted will have to meet the needs of the end users (we, the people). 

It is important to distinguish between the underlying ledger technology that is used to support a currency system and payments system (blockchain and hashgraph for example) and the actual currency unit itself. As an example, one new Fintech innovation just introduced (Glint) does not use blockchain at all, but does hope to re-introduce the idea of gold as a currency people can use in daily transactions. Ben Davies of Glint has this to say about the ledger system they are using:

"One way we did it was to create our own ledger systems using micro-services architecture. It was about taking cutting edge technology and integrating into financial services. The innovation is in the application of that technology.”

Right now what we are seeing is that the major banks and central banks around the world are looking at which underlying supporting technology (like blockchain, hashgraph, various hybrids, etc) works the best in real world testing. 

Until we can get to a universal standard for this kind of underlying ledger technology, it is not really possible for central banks to move forward with the concept of central bank digital currencies. The currencies themselves are not really the innovation. They are just another electronic version of the legal tender currencies they already produce now. 

What is needed is an underlying ledger system that makes it possible to implement a digital version of their currency that is inexpensive, fast, and secure.  It also needs to be "interoperable" (connect to) other banks and central banks existing systems (Bitcoin running on very slow blockchain ledger technology cannot do this and will remain a private virtual currency).

The first technology that central banks can adopt that meets these goals will likely "win out" and gain widespread global adoption in the existing banking system. At that point in time, it becomes more realistic to think in terms of a new "global digital currency" that can utilize whatever new underlying ledger technology eventually gains adoption as the universal standard. Just as VHS became the standard for video players, some new underlying ledger technology will likely do the same in the banking system.

Conclusion

I see the process above as playing out over time in stages. I believe right now we are in the middle of the technology battle for universal adoption of an underlying ledger system that all banks and central banks can plug into. Until that stage is completed, I would expect most central banks (and the IMF) to hold off on moving towards so called central bank digital currencies. I would expect a few central banks to step into the central bank digital currency waters first on test basis using what they believe will become the universal underlying ledger technology that all banks can plug into relatively easily (I am watching Singapore in 2018 for now). 

If and when these initial tests prove successful and the general public finds it attractive, I would then expect to see more and more central banks join in around the world further cementing the technology chosen as the "universal standard" that everyone can plug into. After all that, it would not surprise me to see the IMF look more seriously into the concept of an "IMF Coin" as they mentioned recently. 

This seems to me like the logical way for things to progress over time and why I have said I expect this process to take some time to unfold. What is sometimes overlooked is that it always takes more time than many expect to test out various concepts in the real world and make sure they will actually work and truly meet the end objectives of the final end users. In this case, the final end users would be the general public which will have the final say on what they prefer to use. I

I view that as a good thing. The final product (for a new official global reserve currency) will have to be easy to use, safe, and inexpensive. Any such currency will need to be able to demonstrate it can hold its value over time and retain the public confidence. If legal tender currencies fail in that regard, people will look elsewhere (perhaps to new gold payment systems or virtual currencies like Bitcoin). These days, there are more of choices available for people to consider. That also helps keep the system more honest. If people have real choices, then you must offer them a genuine product that meets their needs and has their confidence or they will opt out to another choice one way or another.

Meanwhile, innovation moves forward as it always does and we wait to see what emerges as the universal standard (or if one actually does emerge). 

Denmark Central Bank Governor Speaks Against CBDC

We have been covering the ongoing discussion/debate over whether central banks will issue so called central bank digital currencies for some time now. We have noted that central banks around the world are looking into this idea while still moving very gradually on any actual implementation. 

Now we have this speech by Denmark National Bank Governor Per Callesen. He speaks against the idea of central banks issuing central bank digital currencies to private citizens for reasons we have pointed out here before. Below is the relevant excerpt from his speech on this issue (added underline is mine).

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. . . . . 

"For very different reasons it is neither to be recommended that central banks change their entire business model from being the banks of banks to issuing digital currency to the general public, say by opening an account for every citizen and company (including foreigners?). For a start it would not create something which is not already offered by private banks. It would not be a substitute to notes and coins but to private bank accounts. 

It would therefore rather open a highway to bank runs, challenging financial stability, unless the amount allowed would be limited to an extent where it could not serve useful transactions purposes. It would add competitive distortions at the expense of private institutions and very substantial costs in terms of IT, staff and regulatory compliance. In addition, piling up large deposits from the general public in central banks would raise the question if central banks should also engage in centralised and perhaps politically motivated lending activities.       . . . . 

Please click here to read the full speech  (summary is here)

CNBC: Singapore to Finish Cryptocurrency Trial in 2018

Earlier this year we mentioned that we might see the first central bank digital currency arrive by next year. We also speculated it might come from Singapore. CNBC confirms in this article that Singapore intends to finish up its testing for such a currency in 2018. Below are a few excerpts from the article.

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"Singapore will conclude its experiment with blockchain technology and its own digital currency next year before deciding whether to commercialize the trial, the country's regulator has told CNBC.

In 2016, the Monetary Authority of Singapore (MAS) announced "Project Ubin," an exploration of blockchain or distributed ledger technology.

The project is split into five phases. The first, which looked at establishing a proof-of-concept design to conduct inter-bank payments using blockchain technology, was completed earlier this year. The second phase, which finished earlier this month, saw the development of three different models for inter-bank payments using blockchain.

Now, the MAS trial is looking at    . . . . . . "      click here to read the full CNBC article

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My added comments: Here we have confirmation of something we have been reporting here for some time. At this point, it is too early to tell if Singapore will issue the first central bank digital currency since other countries (like China) are also looking at the idea. However, it is clear that Singapore has established itself as a leader in exploring innovative Fintech solutions and is moving towards some kind of decision in 2018.

One thing to note here is how slowly these things move. This is why when I see articles proclaiming that some kind of new central bank digital currency is "imminent", I take it with a grain of salt. There is no doubt that many central banks around the world are thinking about the idea. However, when you look at what they have said publicly, they tend to hedge on whether or not they will really move forward with it. I suspect that many central banks want to wait and see how the first early adopter central bank digital currencies work in the real world before moving ahead. This is why what happens in Singapore may be a good indicator for how the idea is accepted more globally.
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Added note: Singapore also continues to struggle with how to deal with private digital currencies like Bitcoin. This article talks about that.

IBM Announces Partnership with KlickEx and Stellar on BlockChain Payments System

IBM has released this news notice that explains its partnership with KlickEx and Stellar to implement what could be a game changing new global payments system based upon blockchain and other innovative technology. We have covered KlickEx here as an up and coming Fintech startup based in New Zealand. This news confirms that KlickEx is ready to move forward with leading payments systems technology alongside major partners.

Below is the press release from IBM that includes links which readers can use to learn more about the IBM Blockchain initiative, KlickEx, and Stellar. KlickEx posted the news release here and Stellar added some comments here. I used bold underline type for what I felt were some key points in the news release.

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IBM--KlickEx--Stellar @ Sibos 2017

TORONTO - 16 Oct 2017: SIBOS: IBM (NYSE: IBM) today announced a new blockchain banking solution that will help financial institutions address the processes of universal cross-border payments, designed to reduce the settlement time and lower the cost of completing global payments for businesses and consumers. Using IBM Blockchain, and in collaboration with technology partners Stellar.org and KlickEx Group, the solution is intended to improve the speed in which banks both clear and settle payment transactions on a single network in near real time.

Today, making international payments can be costly, laborious and error-prone. Transactions in different currencies can require multiple intermediaries and take days or weeks to complete. According to the World Bank, initiatives to modernize payments and provide financial access could improve the flow of currency and commerce, and help achieve the goal of extending financial services to one billion people by 2020*.

The solution is already processing live transactions in 12 currency corridors across the Pacific Islands and Australia, New Zealand and the United Kingdom. Using a blockchain distributed ledger, all appropriate parties have access and insight into the clearing and settlement of financial transactions. It is designed to augment financial flows worldwide, for all payment types and values, and allows financial institutions to choose the settlement network of their choice for the exchange of central bank-issued digital assets.

For example, in the future, the new IBM network could make it possible for a farmer in Samoa to enter into a trade contract with a buyer in Indonesia. The blockchain would be used to record the terms of the contract, manage trade documentation, allow the farmer to put up collateral, obtain letters of credit, and finalize transaction terms with immediate payment, conducting global trade with transparency and relative ease.

IBM has convened an initial group of diverse banking leaders as part of the development and deployment process, including Banco Bilbao Vizcaya Argentaria, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank Permata, Bank Rakyat Indonesia, Kasikornbank Thailand, Mizuho Financial Group, National Australia Bank, Rizal Commercial Banking Corp. (RCBC) Philippines, Sumitomo Mitsui Financial Group, TD Bank, Wizdraw (HK) of WorldCom Finance, and other financial institutions.

 “With the guidance of some of the world’s leading financial institutions, IBM is working to explore new ways to make payment networks more efficient and transparent so that banking can happen in real-time, even in the most remote parts of the world,” said Bridget van Kralingen, Senior Vice President of IBM Industry Platforms. “Making distributed ledger technologies more interoperable is the latest example of IBM’s leadership driving the rapid advancement of blockchain.”  

"TD Bank is pleased to participate along with fellow banking leaders to observe how IBM Blockchain can support more secure and effective payments solutions," said Rizwan Khalfan, EVP and Chief Digital and Payments Officer, TD Bank. "We're focused on innovation that adds value for our customers and our business, and blockchain presents a tremendous opportunity to transform and enhance payment systems, enabling us to continue to evolve the products and services we can offer."

In keeping with IBM's commitment to open source, the solution is run from the IBM Blockchain Platform on Hyperledger Fabric and was built in collaboration with Stellar.org, a non-profit organization and associate member of Hyperledger, and KlickEx Group, a regional financial services company in the Pacific region. Stellar is an open-source blockchain network that is purpose-built for the issuance and exchange of digital assets. Digital assets are issued on the Stellar network as a foreign exchange bridge to allow for near real time settlement. KlickEx Group serves as the founding financial institution for the region, servicing banks, retail clients and consumers using this new network.

IBM will continue to advance the solution with the goal of expanding capabilities in order to support central bank-issued digital currencies, securities, bonds and structured financial assets. IBM Blockchain provides high performance orchestration to move payments among parties. Each payment is immutable once recorded, and settlement instructions are provided via smart contracts on Hyperledger Fabric. Initially, Stellar will provide the network and digital asset to facilitate the settlement of transactions cleared on Hyperledger.

"This new innovation and collaboration represents a significant milestone for Stellar as well as the financial technology industry as a whole," said Jed McCaleb, co-founder of Stellar. "We are using blockchain technology in production to facilitate cross-border payments in multiple integrated currency corridors. Currently, cross-border payments tend to take up to several days to clear. This new implementation is poised to start a profound change in the South Pacific nations, and once fully scaled by IBM and its banking partners, it could potentially change the way money is moved around the world, helping to improve existing international transactions and advancing financial inclusion in developing nations." 

The network is currently in use by Advanced Pacific Financial Infrastructure for Inclusion (APFII) members, a public-private partnership initially funded by the United Nations and SWIFT. It is expected to process up to 60 percent of all cross-border payments in the South Pacific's retail foreign exchange corridors including Australia, New Zealand, Fiji, Samoa and Tonga by early next year. Commercial banks such as Banco Bilbao Vizcaya Argentaria, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank Permata, Bank Rakyat Indonesia, Kasikornbank Thailand, Mizuho Financial Group, National Australia Bank, Rizal Commercial Banking Corp. (RCBC) Philippines, Sumitomo Mitsui Financial Group, TD Bank, and Wizdraw (HK) of WorldCom Finance will be invited to join the network and help it expand in different parts of the world beginning in 2018.

“This is the first time anyone has made blockchain work at an institutionally viable scale,” said Robert Bell, Chairman of APFII and founder of KlickEx Group. “Through KlickEx, the Pacific has had relatively low-cost, real-time, multi-currency payments for most of the past decade, and this project was a natural next step following our work to create seamless and borderless payments across the Pacific. We look forward to the results with using IBM Blockchain as we continue to push forward with our mission to remove payment friction across borders.”

This production blockchain network with KlickEx and Stellar is one of many blockchain projects underway by IBM in financial services including foreign exchange payments netting, private equity administration, securities lending and trade finance.

About IBM
IBM is the leader in open-source blockchain solutions built for the enterprise. As an early member of Hyperledger, an open source collaborative effort created to advance cross-industry blockchain technologies, IBM is dedicated to supporting the development of openly-governed blockchains. IBM has worked with more than 400 clients across financial services, supply chains, IoT, risk management, digital rights management and healthcare to implement blockchain applications. For more information about IBM Blockchain, visit https://www.ibm.com/blockchain/

About KlickEx
KlickEx.co is an award winning regional cross-border payments system delivering financial infrastructure for emerging markets. It has been responsible for dramatic uptake in digital financial services in unbanked regions of the world, and lowering costs for banks, central banks and consumers in low liquidity currencies. KlickEx is also a regional compliance system, active in reducing compliance costs for countries linked to the system. KlickEx owns many of the Pacific's largest Money Transfer Operations, and is the region's largest clearing hub, accounting for over 60% of annual retail foreign exchange transactions (by value and volume) in key corridors. Its key presence is in the Pacific and Europe, and it is a founding member of www.APFII.org processing more than 775,000 transactions per second, per billion of population.

About Stellar.org
Stellar.org is a Silicon Valley based nonprofit organization that supports the Stellar network, a free, open-source network that connects diverse financial systems and lets anyone build low-cost financial services—payments, savings, loans, insurance—for their community. The Stellar network enables money to move directly between people, companies and financial institutions as easily as email. This interconnectivity means more access for individuals, lower costs for banks, and more revenue for businesses. For more on Stellar.org, visit http://www.stellar.org.

*Source: World Bank UFA2020 Overview: Universal Financial Access by 2020. April 20, 2017. http://www.worldbank.org/en/topic/financialinclusion/brief/achieving-universal-financial-access-by-2020

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My added comments: This new collaboration between IBM, KlickEx, and Stellar makes a lot of sense once you dig into the goals of all three organizations. IBM clearly desires to be a global leader in the expansion of the use of blockchain technology in many different sectors. Nothing is more fundamentally important than a global payments system that anyone can use on mobile device at very low cost to complete payment transactions around the world. We have talked about this concept many times here on this blog. 

KlickEx provides years of experience in delivering this type of payments system on a regional basis in the South Pacific. The CEO of KlickEx, Robert Bell, is a very passionate advocate for financial inclusion and low cost remittances and has been recognized around the world for his efforts in that area. It only makes sense that he would want to join up with IBM to deliver a low cost payments system on a broader platform than just the South Pacific. We felt like when we first learned about KlickEx that it would be a company to watch and this big step forward for KlickEx is an example why. I would expect KlickEx to continue its efforts to assist in spreading low cost payments and cross border transactions to more and more places around the globe based on the real world experience they have gained over the last decade in the South Pacific. I would also expect that this could be the start of a process that can lead to some initial central bank digital currencies, perhaps starting in Singapore (seems IMB's Jesse Lund agrees).

All you have to do is look at the Stellar mission and mandate to see why they would want to be involved with this project. Once again, they are dedicated to doing what they can to bring low cost payments and money transfers to the world. This is particularly important for workers who are un-banked or who may be sending remittances across borders back to family members in another country. 

The common thread you see in all three of the organizations involved in this project if you look into them is that they desire to make the financial system accessible to those who cannot access it now and to make the movement of money for payments and transfers a much more efficient and low cost operation for everyone involved. 

We note that IBM states in the press release that this system is designed to be "interoperable" with existing banks and central banks . This is a huge point that should not be overlooked.  

Robert Bell (KlickEx) says this:

“This is the first time anyone has made blockchain work at an institutionally viable scale,”

Robert helped present this concept at the Sibos conference in Toronto, Canada alongside Jesse Lund of IBM and Jed McCaleb of Stellar.

Widespread adoption of this by both banks and central banks should not be surprising over the coming months and years. This is the type of thing that can lead to more major monetary system change like we watch for here over time. 

This news attracted quite a bit of attention globally as can be seen from these articles:

CNBC

Business Insider

Silicon Republic

IBS Intelligence

Computer World

Enterprise Times (UK)  "IBM becomes the blockchain monster"

Finovate

City A.M.

FX Week

Coin Desk

ZD Net

Banking Technology

Banking Business Review

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Added note:

Jesse Lund (IBM) Blockchain article posted on his LinkedIn page (may require LinkedIn account to read).  Here is a quote from his article dated May 2017:

"Whether it’s Bitcoin, or something better that soon follows like a central bank issuance, digital currencies will offer tangible improvements to financial services, and especially international payments."       . . . . . .

"Anyone with a mobile device will be able to hold a digital bank account (truth is, they already can). Hopefully this will lead to a reduction in corruption as barriers between people and money disappear, enabling peer-to-peer philanthropy and direct financial aid. No place on earth will be out of reach."