Isle of Man Goes Crypto-Crazy

I'm indebted to my colleagues in the Isle of Man for pointing me to the IoM's recent Designated Businesses (Registration and Oversight Act 2015, which imposes various registration and anti-money laundering requirements on distributed ledger technology. Do we have a poster-child for how regulation of new technology can go way too far?

The IoM compliance obligations are aimed at: 

"the business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including crypto-currencies or similar concepts where the concept is accepted by persons as a means of payment for goods or services, a unit of account, a store of value or a commodity;"

This seems likely to be counter-productive, to say the least, given that the 'currency' aspect of distributed ledgers is often merely there to reward the 'miner' or processor of transactions or events that occur on the ledger, regardless of whether those events are themselves financial in nature - financial services being merely one of many different potential applications.

So, should every business on the IoM that uses, or might wish to use, distributed ledgers register with the authorities and introduce AML controls on everyone it deals with, just in case? Maybe so...

Two specific points to make:

1. ‘convertible virtual currencies’ are defined more broadly than one would expect:

“including crypto-currencies or similar concepts [neither term being defined, except by what follows…] where the concept is accepted by persons as a means of payment for goods or services, a unit of account, a store of value or a commodity”, 

Most definitions of a ‘currency’ require all these criteria to be met, not just any one of them. Imagine what would happen to the US Dollar, for example, if suddenly it was not accepted as meeting just one of the above criteria...  Indeed, for this reason many people disagree that Bitcoin - the most widely used form of 'crypto-currency' - is still nothing more than a commodity.

In addition, none of the typical exemptions under payment services regulations seem to be imported here. To take but one relevant example: consumer loyalty/rewards programmes are typically exempt on the basis that the rewards are only accepted as a means of payment within a 'limited network'. Do the local authorities really want every business participating in a loyalty scheme on the Isle of Man to register and apply AML controls just because the scheme involves distributed ledger technology? Maybe so...

2.  Similarly, the list of activities that trigger the relevant compliance obligations would seem to cover a vast array of potential services and their providers/users - recognising that these are distributed ledgers to which all computers running the protocol have the same access. Again, just think of consumer loyalty programmes as you go through the list:

the business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating...

Even payment services regulation, for instance, exempts technology services that support transactions without the service provider handling funds. And the whole point of the ledger is that no intermediary is actually handling funds - its all happening peer-to-peer amongst machines - indeed perhaps everyone's device is handling the funds. Furthermore, there will be instances where access to a distributed ledger is just one element of a wider system - as in the car-rental example, or tracking shipping containers - and it may not be clear to everyone that a distributed ledger is involved if it's just to share the location or state of a vehicle or container.

Still, the Isle of Man's approach might at least be useful in demonstrating how regulation in this area can go too far...

Better Services For SMEs: Follow The Data

I was at a 'parliamentary roundtable' on Tuesday on the perennial topic of small business banking reform. A more official report will be forthcoming, but I thought I'd record a few thoughts in the meantime (on a Chatham House basis). 

It still seems to surprise some people that small businesses represent 95% of the UK's 5.4m businesses - 75% of which are sole traders - and that they account for 60% of private employment, most new jobs and about half the UK's turnover. So-called 'Big Business' is just the tip of the iceberg, since only they have the marketing and lobbying resources to be seen above the waves. As a result small businesses have long been a blind spot for the UK government - until very recently - and the impact has gone way beyond poor access to funding. It includes slow payment of invoices, the absence of customer protection when dealing with big business and lack of alternatives to litigation to resolve disputes.

What's changed?

A combination of financial crisis, better technology and access to data has exposed more of the problems surrounding SMEs - and made it possible to start doing something about them. And it's clear that legislators are prepared to act when they are faced with such data. The EU Late Payments Directive aimed to eliminate slow payments. The UK has created the British Business Bank to improve access to finance, as well as a mandatory process for banks to refer declined loan applications to alternative finance providers and improved access to SME credit data to make it easier for new lenders to independently assess SME creditworthiness. The crowdfunding boom has also been encouraged by the UK government, and has produced many new forms of non-bank finance for SMEs, including equity for start-ups, debentures for long term project funding, more flexible invoice trading and peer-to-peer loans for commercial property and working capital.  Last week, the FCA launched a discussion paper on broadening its consumer protection regime to include more SMEs.

Yet most of these initiatives are still to fully take effect; and listening to Tuesday's session on the latest issues made it clear there is a long way to go before the financial system allocates the right resources to the invisible majority of the private sector.

A key thread running through most areas of complaint seems to be a lack of transparency - ready access to data. This seems to be both a root cause of a lot of problems as well as the reason so many proposed solutions end up making little impact. But the huge numbers and diversity of SMEs presents the kind of complexity that only data scientists can help us resolve if we are to address the whole iceberg, rather than just the tip. That's surely one job for the newly launched Alan Turing Data Institute, for example, although readers will know of my fear that it seems more aligned with institutions than the poor old sole trader, let alone the consumer. So maybe SMEs need their own 'Chief Data Scientist' to champion their plight?

The latest specific concerns discussed were as follows:

• despite much regulatory activity, few bank reforms have actually taken effect - and many are being watered down - with the result that the banking picture is worse, if anything, than it was in 2008. Recent fines and scandals reveal little change in culture from that described in the report of the Parliamentary Commission on Banking Standards and most recently in the damning report into the failure of HBOS. In addition, banking is more concentrated (despite a few new entrants); less diverse in terms of ownership structure, competition, regional coverage and financial model; and still only about £200bn or 3% of bank assets are focused on SMEs and GDP producing activities. The trouble is we've known this for some time, but aside from the BBB's activity on access to funding, we still seem unclear on what can be done for SMEs at a regional or local level;

• the recent findings and remedies proposed by the Competition and Markets Authority into business current accounts are widely considered to be weak and unlikely to be effective - try searching the word "data" in the report to see how often there was too little available. The report still feels like the tip of an iceberg rather than a complete picture of the market and its problems;

• austerity imperatives seem to be the main driver for off-loading RBS into private shareholder ownership - the bank pleading to be left to its own devices (not what it suddenly announced to the Chancellor in 2008!) - and trying to kill-off any further discussion of using its systems as a platform for a network of smaller regionally-focused banks (as in Germany);

• bank lobbying has become more powerful - and will become even more so with the merger of their various mouthpieces - we need much more transparency on banks' access to government and the revolving door between the City and Whitehall/Westminster - we should have learned long ago that the interests of large banking groups are not aligned with SMEs (or consumers);

• SMEs lack an effective means of resolving disputes with banks, as the Financial Ombudsman Service has limited jurisdiction; banks refuse to release internal reports related to credit decisions and calling in loans; while the FCA is said to be hiding behind its confidentiality obligations; and banks have too much legal fire power for SMEs to take them on in court - hence moves to take matters into their own hands. The FCA has clearly woken up to this, but it's recent discussion paper shows there's a huge gap to close.

• the financial infrastructure for SMEs appears not to be geographically diverse - it doesn't yet mirror the Chancellor's "Northern Powerhouse" policy, for instance - despite calls for bank transparency on the geographical accessibility, a US-style "Community Reinvestment Act" and clear reporting on lending to SMEs by individual banks (rather than the Bank of England's summary reporting). There's a sense that we should see some kind of financial devolution to match political devolution, albeit one that still enables local finance to leverage national resources and economies of scale. Technology should help here, as we are tending to use the internet and mobile apps quite locally, despite their global potential;

• Some believe that SMEs need to take more responsibility for actively managing their finances, including seeking out alternatives and switching; while others believe that financial welfare should be like a utility - somehow pumped to everyone like water or gas, I assume - indeed regional alternative energy companies were touted as possible platforms for expanding access to regional financial services. My own view is that humans are unlikely to become more financially capable, so financial and other services supplied in complex scenarios need to be made simpler and more accessible - we should be relying less on advertising and more on hard data and personalised apps in such instances.

• Meanwhile, SME are said to lack a genuine, high profile champion whose role it is to ensure that the financial system generally is properly supportive of them. This may seem a little unfair to the Business Bank, various trade bodies and government departments, but it's also hard for any one of these bodies to oversee the whole fragmented picture. As I suggested above, however, I wonder whether a 'data champion' could be helpful to the various stakeholder in identifying and resolving problems, rather than a single being expected to act as a small business finance tsar. 

 In other words, we should follow the data, not the money...

Poor Competition In Personal and #SME Banking (and What the CMA Plans To Do About It)

The Competition and Markets Authority has been investigating the state of competition for personal and small business bank customers, and the results are pretty shocking. The full report is here, the summary of findings here and the possible remedies are here.

We have until 20 November to comment on the findings and remedies (email retailbanking@cma.gsi.gov.uk). The CMA's provisional decision on remedies is due in February 2016 and the final report in April 2016.

Most glaring is the fact that 99.9% of all UK businesses are small - over 5 million of them - and the vast majority of them are sole traders. Yet small businesses do not benefit from most of the customer protection and other measures aimed at improving services and increasing competition for personal customers.

You would also think banks would do more to look after small businesses, given they are responsible for at least 5 million self-employed roles, and most new jobs come from that sector. But only 60% of SMEs survive beyond three years and only 40% make it past the five year mark. It's true that no job is for life, anymore, but poor financial services must surely be a factor in such high business death rates.

More has to be done to help this sector thrive. Have your say! 

Labour's Idealistic March Into Oblivion

So, another political 'party' season slips by and the casual observer would think the Tories' policies must be more or less the right. There are no practical alternatives for anyone interested in the decisions actually required to drag the UK back from the abyss into which it's been staring for decades. Fortunately, that seems to be the majority of voters - the electorate finally understands that the UK reached the limit of taxing and spending sometime in the noughties and it's the Government's job to figure out how to do less of both.

Sadly, the Labour Party is giving up on such tough decisions, preferring the cosy bubble of idealism in which the air is a mixture of moral panic and dogma, and the 'answer' must fit on a placard. 

For instance, this week's 'news' that a single grammar school in Kent is expanding is said to threaten the quality of teaching at every school in the country, and Labour's 'solution' is that all children must go to state school. 

Trident costs too much? Unilateral disarmament. 

Steel plants to close through lack of demand for British steel? Nationalise them.

A living wage? Tax credits.

Unhelpful, impracticable, unrealistic, vacuous, dogmatic twaddle.

And since Liberal Democrat voters decided they, too, are sick of their party having to make the hard decisions, we are left with the Tories having to be their own conscience...  and do all the work.  

Let's hope they get it right - and remember, every country has the government it deserves.

The Alan Turing Institute: Human-centric?

A slightly dispiriting day at The Alan Turing Institute 'Financial Summit', yesterday, I'm afraid to say. 

The ATI itself represents a grand vision and stunning organisational achievement - to act as a forum for focusing Britain's data scientists on the great problems of the world. Naturally, this leaves it open to attempts at 'capture' by all the usual vested interests, and its broad remit means that it must reflect the usual struggle between individuals and organisations and between 'facilitators', who exist to solve their customers problems, and 'institutions', who exist to solve their own problems at their customers' expense. 

And of course, it's the institutions that have most of the money - not to mention the data problems - so I can see, too, why the ATI advertises its purpose to institutions as "the convener of a multidisciplinary approach to the development of 'big data' and algorithms". It's true also, that there are global and social issues that transcend the individual and are valid targets for data scientists in combination with other specialists. 

But it was concerning that an apparently neutral event should seem predicated on a supplier-led vision of what is right for humans, rather than actually engineering from the human outward - to enable a world in which you to control what you buy and from whom by reference to the data you generate rather than by approximating you to a model or profile. Similarly, it was troubling to see a heavy emphasis in the research suggestions on how to enable big businesses to better employ the data science community in improving their ability to crunch data on customers for commercial exploitation.  

To be fair, there were warning signs posted for the assembled throng of banks, insurers and investment managers - in the FCA's presentation on its dedication to competition through its Innovation Hub; a presentation on the nature and value of privacy itself; and salutary lessons from a pioneer of loyalty programmes on the 'bear traps' of customer rejection on privacy grounds and consumers' desire for increasing control over the commercial use of our data. The director's slides also featured the work of Danezis and others on privacy-friendly smart metering and a reference to the need to be human-centric.  

But inverting the institutional narrative to a truly human-centric one would transform the supplier's data challenge into one of organising its product data to be found by consumers' machines that are searching open databases for solutions based on actual behaviour - open data spiders, as it were  - rather than sifting through ever larger datasets in search of the 'more predictive' customer profile to determine how it wastes spends its marketing budget.

Personally, I don't find much inspiration in the goal of enabling banks, insurers and other financial institutions to unite the data in their legacy systems to improve the 'predictive' nature of the various models they deploy, whether for wholesale or retail exploitation, and I'm sure delegates faced with such missions are mulling career changes. Indeed, one delegate lightened the mood with a reference to 'Conway's Law' (that interoperability failures in software within a business simply reflects the disjointed structure of the organisation itself). But it was clear that financial institutions would rather leave this as an IT problem than re-align their various silos and business processes to reflect their customers' end-to-end activities. There is also a continuing failure to recognise that most financial services are but a small step in the supply chain, after all. I mean, consider the financial services implications of using distributed ledgers to power the entertainment industry, for example... 

When queried after the event as to whose role it was to provide the 'voice of the customer', the response was that the ATI does not see itself as representing consumers' or citizens' interests in particular. That much is clear. But if it is to be just a neutral 'convenor' then nor should the ATI allow itself to be positioned as representing the suppliers in their use and development of 'big data' tools - certainly not with £42m of taxpayer funding. 

At any rate, in my view, the interests of human beings cannot simply be left to a few of the disciplines that the ATI aims to convene along side the data scientists - such as regulators, lawyers, compliance folk or identity providers. The ATI itself must be human-centric if we are to keep humans at the heart of technology.