Two Holy Grails For Cross-border Payments: Access and Interoperability

A new international banking report admits to continuing problems in making payments from one country to another, but points to improvements. The report is based on a detailed analysis of the market, a survey of about 100 service providers and workshops with stakeholders from the supply side and the demand side (end users). Efforts to widen access to online payment accounts and prepare the way for the interoperability of payment systems/networks, closed-loop systems and crypto-currencies would seem the most fertile ground for achieving quicker, cheaper and more transparent cross-border retail payments.

Findings include:

• Cross-border retail payments are generally slower, less transparent and more expensive than payments within the same country. 

• Even large corporate users making high-value and/or frequent payments experience a lack of transparency and uncertainty over settlement timing and exchange rates. 

• Smaller businesses and individuals who typically make smaller, less frequent payments are more concerned about access to services and high costs.

• Users' priorities depend on their particular circumstances and requirements, so choice of different options and features is critical.

• Most users have choice as to who provides their payment services but individuals without access to transaction accounts lack access to many initiatives that have improved convenience and speed for other users. So, progress towards providing universal access to (online) transaction accounts is likely to provide more options to those who currently rely on cash.

• Back-end service providers themselves have problems with messaging, clearing and settlement of cross-border retail payments. There is little choice among back-end clearing and settlement methods, with the only feasible option often being correspondent banking rather than, say, ensuring the linking or interoperability of payment systems/networks, closed-loop systems and peer-to-peer distributed ledger technologies (e.g. crypto-currencies). So, progress towards harmonised messaging standards and simultaneous trading and settlement of different currencies will help solve problems here and could result in quicker, cheaper and more transparent cross-border retail payments. 

Forking The DAO - Robin Hood Update

No, this is not science fiction: the Ethereum world really has been rocked by financial scandal, and has less than a month to resolve it.

It's very hard to explain this situation simply to fans of financial scandals who may be less familiar with cryptotechnology.

In essence a bunch of people ('curators') got together and created - or curated - a new type of open association, which they christened a Decentralized Autonomous Organization, and this first example “The DAO". 

The DAO is built on a new type of cryptographic software platform called a 'distributed ledger' or 'blockchain', in this case known as Ethereum. Such ledgers typically have their own virtual currency, in this case called 'ether'. 

The DAO's rules are in written in software code, so it is in fact a computer programme (or application or 'app'). The DAO is designed to be controlled by investors who use their 'ether' to buy DAO 'tokens' that entitle them to vote on the The DAO's affairs - the main issue being how the DAO should invest the 'ether' it raises through selling 'tokens' to investors, who can also start mini-DAO or 'child DAOs' to focus the investments. By last week the The DAO had raised $60m worth of ether at the going exhange rate.

You can maybe see what's coming...

A savvy participant noticed that The DAO would allow any participant to start a 'child DAO' under their own control and drain 'ether' from The DAO into the child DAO without bothering any of the other participants. 

So they did. 

Cue outrage!

The other participants and 'curators' now say this move was an "attack" that exploited a 'vulnerability' arising from a 'mistake' in The DAO's code. As a result, a 'soft fork' has been imposed by the DAO's 'curator' for 28 days, effectively freezing the child DAO and the ether within it. Many of The DAO's participants want to see the soft fork become permanent - or a 'hard fork' (this saga is providing endless scope for unfortunate puns). Yet The DAO web site's makes it very clear that the code is the sole contract governing The DAO (though what contractual significance The DAO's web site has is therefore questionable).  At any rate, The DAO clearly allowed what in fact happened.

It's ironic that the self-styled "attacker" has resorted to lawyers and is threatening court action to protect his/her/their financial gains. But it would be a fascinating case to run, and a real-world judgment on the issues (applicable law, jurisdiction, whether there was a mistake for which relief could be given etc.) could actually be very helpful to the development of distributed ledgers and the applications that run on them.

23 June:

Meanwhile, the parties are battling it out in a cryptographic re-enactment of Robin Hood (or Barbarians at the Gate?). So-called 'white hat' hackers (claiming to be 'good actors') attempted to secure the remaining ether in The DAO in other child DAOs but the 'attacker' joined them as well.

But is either set of participants 'right' or 'wrong', 'good' or 'bad'? Are they not simply competing in any fashion that The DAO allows?

Would you do business with The DAO or its 'children'?

Would you be happy for The DAO or any child DAO to be an investor in your business? 

Watch this (cyber)space!

Further reading:
Frances Coppola has written a great piece for Forbes.
Introduction to the DAO.
Open letter from "The Attacker".
DAO Wars: Hacker Counter-Attacks and Infiltrates the Robin Hood DAOs

Distributed Ledger Technology: Cutting Through The Hype

A busy start to 2016 has meant the blogging has suffered, but I have at least co-written an article with Susan McLean of Morrison & Foerster that cuts through the hype around blockchain and other distributed ledger technology (DLT). 

The article includes updates on a range of DLT initiatives across numerous business sectors; various policy and regulatory responses; as well as some thoughts on the challenges involved in implementing DLTs.

You won't be able to put it down! ;-)