Total anonymity or enhanced privacy for payments?

Anonymity in payments is a complicated topic with no easy answers. There are those who favour complete anonymity, and then there are those who see that position as dangerous. Even the regulators aren’t too sure about which way to turn, as evidenced in the US Government Accountability report on “Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges” (May 2014). It concluded, “that virtual currency systems “may” provide greater anonymity than traditional payment systems.”

Fintech expert David G.W. Birch, who has been pondering the issue for some time, and who has a ‘pseudonymity’ solution, examines it by looking at lottery winnings. He cites the case of a US lottery winner who took a case to court (as Jane Doe) because she wanted to retain privacy about her winnings. Why was she so desperate to do that? Perhaps another case Birch tells about explains it: “In November 2015, Craigory Burch Jr. matched all five numbers in the Georgia Fantasy 5 drawing and won a $434,272 jackpot only to be murdered in his home by seven masked men who kicked in his front door.”

However, in the case of Jane Doe it is clear that even if she managed to keep her winnings private, some people would know about it, namely the lottery people and her bank. As Birch says, “Being anonymous is really difficult in an infrastructure that has no anonymity.” On the other hand, if you have an anonymous system it is relatively easy to add non-anonymity to it if desired.

So, if we are designing future infrastructures, should they allow for the kind of anonymity the lottery winner wanted? Birch gives the example of New Hampshire, which allows people to form anonymous trusts and these trusts can buy lottery tickets. However, the money still has to go to a bank account.

Cryptographics could be the answer. For example, if you win the lottery, your money can be sent to your cryptocurrency address (which is in the ticket) without the lottery owner or anyone else having the slightest idea to whom it belongs.

However, there is resistance to the idea of electronic money, and central bank digital currencies in particular, to be anonymous. But there is a case for “a privacy-enhancing digital Dollar. This would be very appealing on a global scale in contrast to digital currencies subject to continual state surveillance.”

If that can be achieved, it will be to the advantage of digital currencies.

Coded Bias: a film exploring AI

Have you seen Coded Bias, a new film from Netflix? If you are at all interested in artificial intelligence (AI), I recommend you find a way to watch it, even if you don’t have a Netflix subscription. It takes a deep dive into the state of artificial intelligence, and as Aparna Dhinakaran writes at Forbes, “the issues it confronts are uncomfortably relevant.” What she is referring to is the facial recognition programmes that have a severe algorithmic bias against women and people of colour.

MIT Media Lab researcher Joy Buolamwini says in the film, “The systems weren’t as familiar with faces like mine (as those of mostly men and lighter-skinned people),” and her research showed that Microsoft, IBM, and Amazon’s facial recognition services all have common inaccuracies.

The Netflix film examines how these inaccuracies can spread discrimination across all spheres of daily life. It also touches on other spheres of AI use where bias occurs, such as “who gets hired, what kind of medical treatment someone receives, who goes to college, the financial credit we get, and the length of a prison term someone serves.” This is not the aim of AI, which should be used to enhance opportunities and advancement for all people, particularly those most vulnerable to discrimination.

 Coded Bias tries to show us how these issues with AI can be removed, with the onus lying in looking at how AI leverages data and how it is developed, deployed, and used. The film’s director, Shalini Kantayya said, “This is a moment where we are all in a lot of pain. This moment is asking us to drop into a deeper place in our humanity to lead.” She also attempts to shine a light on why better AI solutions should be focusing on protecting those communities that stand to be harmed the most by it.

One way forward is to look at the innovations in AI/ML (ML is machine learning). These will change how AI models are observed and measured to ensure fair, ethical, and absent bias. There is also a need to deliver AI systems that have better tools for accountability.

We live in a time when socio-economic inequities based on ethnicity are in the spotlight, therefore we need AI that makes it easier for marginalized populations to benefit from improved technology, rather than the technology pushing them further into the margins. When that happens we will all experience a better world.

A look at the Money-verse in 2028

Today money is going through an evolutionary process as I write. The choices the finance sector, and the consumer, make today will shape the future of money, and we can already see that the world’s sovereign currencies are under siege from cryptocurrencies and stablecoins.

Bitcoin has not yet brought about the massive revolution that some expected on the one hand, but on the other, if “governments and central banks can’t offer a sound version of the sovereign money for the digital age, their downfall could be tragic,” Marcelo M Prates writes at Coindesk.

Prates envisages a ‘ future fantasy’ scenario in 2028 that may become reality. Amongst other things he sees, “ see drones dropping bags of money in the neighborhoods most affected by the latest cyber-attack on the e-Gov platform.” Regardless of whether the attack is foreign or domestic, “nobody can transfer digital dollars or even check their FedAccount balance.”

In his view, this kind of disaster could happen if the government decided not to offer an offline account option. Why not? The government might believe “people would finance domestic terrorism with an offline FedCoin that could be transferred from person to person without identification.”

As a result, every time the e-Gov platform is attacked, the government has to send out bags of old dollar bills so that people can make payments.

There may also be a global Big Tech Alliance offering its own digital asset that launches before a government-backed one, and it could potentially result in a fall in demand for dollars, especially if inflation is rising at a record pace.

Governments will have to deal with the fallout from the huge expansion in spending during 2020. Nations’ debts will be soaring, and it’s foreseeable that printing more money might well become a response.

Banks will also be affected if an organisation, such as Prates’ Big Tech Alliance offers customers a compelling reason to empty deposits in traditional banks, and use it for the consolidation of other debts, thanks to favourable loans. The result would possibly be multiple bank closures.

This entire scenario is likely to happen due to central banks’ ambivalence about digital currencies. In Prates’ world, “Many believe that the breaking point came when the government insisted on having exclusive control over the digital ID scheme created to provide every American citizen and corporation with a single digital identity. The goal was to keep track of the vaccination progress amid different coronavirus variants and better target the relief money sent monthly.” However, centralization is rejected, as it “was seen as a further step toward the growing surveillance state.”

What is clear, even now, is that the technology available makes a multi-faceted Money-verse entirely possible, because as Prates says, “Money does not need to be controlled by a government or limited to a sovereign territory anymore.”

Central banks need to get their digital strategy right, or face the consequences in the not too distant future.

Neobanks grow in 2020

Some good news to come out of 2020 is the growth in neobanks. According to Finextra, Exton Consulting has produced data showing that there are currently 256 neobanks globally, and several more waiting to launch.

The data indicates that a new banking business opened every five days over the last three years, and that Europe is still the main location of innovation, with three of the five most advanced markets being in the region. They are the UK, which is recognised as a neobanking powerhouse, followed by France and Sweden. It also reports that 50 million people in Europe have opened a neobanking account.

Europe leads in neobank innovation

Other markets are catching up with Europe, most notably South Korea and Brazil, but there is also substantial movement in the USA. China is somewhat unique in its challenger bank development, but it is unrivalled in terms of its numbers of clients using the “financial super apps” available there.

On the downside, not all challenger banks have been able to stay the course. A significant number of players relied on payment interchange fees as a revenue stream, and there has also been vulnerability due to rising number of defaults on loans. As a result, more than 30 neobanks have been wound down since 2015, with Australia’s Xinja being and an example.

New routes to profitability

Exton says: “On their quest for monetizing customer relationships neobanks have learned a first lesson: payment transaction fees, premium account subscription fees, or open banking commissions from brokering 3rd party services will in most cases not be sufficient to generate profits or breach beyond operational break-even.” It added, “Our expectation much rather is that Neobanks will need to offer additional products to jump the gap to sizable profitability.”

Digital lending may be one opportunity where the neobanks can thrive. Another option is, “the morphing of the product outside of financial services via the development of a super app, ” and a third possible route to profitability “lies in providing investment services to the mass affluent market.”

Exton concludes, “Irrespective of which path neobanks will take, we remain convinced that they will need to shift into profitability mode quickly as investor patience will not be unlimited. But for those that select the paths right for them, stay focused on it and grow up as an organization, the future remains bright and full of opportunities.”