The Evolution of Money – Part 3

Currently, government money (e.g., USD, ZAR, GBP) can only be held in two forms: physical cash (physical bearer instrument) or digital money in a bank account (digital registered instrument). Crypto currency is a new form of money that can be offered as a third form of central bank issued money. It is only a matter of time before central banks issue their own crypto instruments in the form of central bank issued crypto currencies (CBCCs).

(This is a continuation of my earlier blogs “The Evolution of Money – Part 1 ” and “Part 2 ”)

Currently, government money (e.g., USD, ZAR, GBP) can only be held in two forms: physical cash (physical bearer instrument) or digital money in a bank account (digital registered instrument). Crypto currency is a new form of money that can be offered as a third form of central bank issued money. It is only a matter of time before central banks issue their own crypto instruments in the form of central bank issued crypto currencies (CBCCs).

While the term CBCC may scare some in the regulated space as “crypto currencies” have become associated with unregulated tokens of value, the term merely differentiates it from the digital money that sits on commercial banks’ balance sheets as liabilities. Its name is derived from the cryptography that allows it to be a crypto instrument.

Just as no distinction is made between the value of a physical $100 bill and $100 in digital money that appears in an online bank account, so too would the value of $100 in CBCC be the same as the first two forms of money. The currency would remain the same. Only the form would change. The emergence of CBCC would not change the money supply[i] in an economy.

The introduction of a third form of regulated money, CBCC, would replace another form of money to keep the money supply constant ceteris paribus. Just as one deposits a $50 note at the bank which gets replaced by $50 in an online bank account, so too would $50 in CBCC have to replace some other form of money already in circulation. A central bank could easily set up a trust account to receive digital money (which it could take out of circulation) and issue a corresponding amount of CBCC to be sent to a wallet address of the digital money sender. In this way, the form of money as we know it could migrate from digital money to CBCC.

By migrating the predominant form of money in an economy to CBCC on a sovereign blockchain (a shared ledger under the jurisdiction of a central bank), a central bank could observe real time transactions in an economy to better understand the velocity of money and gauge the health of the economy on a daily or even hourly basis. Once a sovereign blockchain is created with a CBCC, other financial instruments such as bonds, equities, derivatives and even land and car registries could migrate to the same sovereign blockchain. This would allow the central bank to conceivably see the creation of all commercial bank assets in an economy in real-time, including the categorisation of those assets (e.g., collateralised loans vs. unsecured loans). Such transparency is invaluable to any central bank and would make decision-making more informed, timely and effective.

With a view of all transactions in an economy, anti-money laundering initiatives would be greatly enhanced. As it stands, payments from customers at a single bank are not always seen by the regulator as they are updates to that particular bank’s ledger and do not get processed through a national payments system, making the historical flow of money difficult to track. In contrast, a sovereign blockchain would allow the movement of money to be traced through a historical path of transactions on a single decentralised ledger.

Tax collection could be revolutionised through the use of smart contracts on a blockchain. Tax could be collected at the point of transaction in real time, changing the entire system of tax collection from “after-the-fact collection” to “in-the-moment payment”. Imagine every payment to a retailer being automatically split at the time of payment so that 10% (a sales tax for example) would be paid directly to a government address with no inconvenience or cost to the customer or merchant. This would significantly reduce the burden and cost of tax compliance for the merchant (as they would be paying their taxes automatically throughout the year) and improve collections for the tax authority.

This is just one example of how tax could be streamlined, but other examples abound – automated Capital Gains Tax when a vanilla asset is sold (the blockchain would have the history of what the asset was initially bought for and a smart contract could calculate the tax owed and pay both the seller and the tax authority in a single transaction); automated transfer duty on property sales; automated income tax payments when salaries are paid etc. The very notion of a withholding tax could become obsolete.

The blockchain would also allow the “codification of money”. Imagine a world in which the money paid into the account of the Department of Education could only be disbursed to accounts associated with schools or where money sitting in the government’s social grant account could only be paid to accounts of individuals flagged as eligible to receive those grants. The combination of the codification of money and the transparency that the blockchain allows would go a long way in combatting corruption.

[i] Money supply is defined as the total amount of monetary assets in an economy’s currency, the summation of physical notes and coins as well as digital money (the nuances of narrow and broad money definitions of M0, M1, M2 and M3 are not pertinent to the point at hand).

by Farzam Ehsani

RegTech: a key component of the burgeoning FinTech movement

Unpacking the opportunity to build a robust, compliance function with innovative tech solutions promising many benefits, derived from a number of applications.

A few months ago, I was lucky enough to be “the chosen one” at our consulting firm to join the rest of our team working at the Foundery. I was told that the Foundery was all about developing FinTech capabilities to solve inherent challenges within banking in a unique way. Thus, we had to be up-to-date with the new technologies in this space. “RegTech” was one of these new technologies that were on our radar, and I had to develop a research pack on it… My initial reaction was that of a student opening up her exam paper having no idea where to begin… and in this case, there would be no “winging it” either! Yet, as I embarked upon this journey, I was fascinated by the immense potential of reducing compliance costs for financial institutions using this technology of today to facilitate the delivery of regulatory requirements in an innovative way and wanted to delve deeper into this amazing world of RegTech. So, here are some of my discoveries from this journey:

What is RegTech?

RegTech, as the word suggests, is an amalgamation of regulation and

technology, a niche carved out from Fintech. Javier Sebastián, BBVA Research’s expert in digital regulation, also explains that it is deemed a subarea of what is generically known as Fintech. He adds that RegTech providers who are, “harnessing the capabilities enabled by new technologies such as cloud computing, big data, and blockchain, are devising solutions to help companies across all sectors of activity ensure that they comply with regulatory requirements.”

What type of solutions does RegTech offer?

Globally, RegTech encompasses many different technologies that can reduce the cost of compliance & show commitment to high standards of regulatory compliance, through the use of advanced data analytics, risk & control convergence, and sustainable & scalable solutions. The solutions can fall into three buckets: Interpretation, Implementation & Optimisation.

  • Interpretation solutions are solutions that help in decoding regulatory requirements. These include regulatory gap analysis tools, compliance universe tools and training tools to track and understand the regulations & help build risk management plans thereof.
  • Implementation solutions assist in doing the actual work to meet the regulatory requirements. These include regulatory reporting & health check tools, incorporating everything from compiling and interpreting data, to producing gap analyses and ad-hoc reports.
  • Optimisation solutions are customised solutions that simplify the compliance process further, on an organisation level, through automation and machine learning. Management information, transaction reporting & analysis, and case management tools fall under this category. These tools empower compliance functions to make informed risk choices based on data-provided insights about the compliance risks the company faced and how it mitigates and manages risks.

Is there really a need for RegTech?

The cost of compliance in the financial services industry is high, and continuously rising, with the supervisory backdrop growing more complex, and constantly changing regulations and processes. According to the Consumer Financial Protection Bureau of the United States of America, on an average, large banks with an asset size of $1 billion to $100 billion, have total compliance costs of 1.4% of estimated retail deposit operating expense. Operations, HR and IT carry the largest share of these costs. The cost of non-compliance is even higher than the cost of compliance, with increasing penalties and fines paid by banks year-on-year.

Investments in regulatory software have the potential to address this immediate challenge of regulatory compliance which can lead to an ROI of 600+% with a payback period of less than three years, according to letstalkpayments. Hence, the global demand for regulatory, compliance and governance software is expected to reach USD 118.7 billion by 2020. But, yet it still remains a relatively small recipient of Fintech funding. This is because dominant, widely used solutions are yet to emerge, and financial institutions are often still unfamiliar with the technology. Regulatory reform is also not yet complete; uncertainty about the exact reporting requirements makes it harder for financial institutions to choose a particular compliance solution.

Is RegTech here to stay?

With growing regulations, there is a growing demand to oversee data, reporting, and operational processes. A growing number of start-ups have the potential to meet this demand. But, RegTech is about the application of technology to solve a specific regulatory problem, rather than the technology itself. Thus, each of the key players in the system has a distinct role to play in the growth of this technology, through the development of common industry solutions and successful integration into risk management frameworks within the wider regulatory change agenda. Financial Institutions have a primary responsibility for supporting this development, by creating IT and risk infrastructures that are capable of integrating these new solutions.

Supervisors and regulators can also provide support by creating an enabling regulatory environment, where financial institutions can safely share their challenges in compliance and opportunities. The UK is taking the lead to encourage the rest of the world to follow suit. In 2015, the Financial Conduct Authority (FCA) announced its 2016/17 business plan focussed on supporting the widespread adoption of RegTech. The FCA, through its ongoing roundtables and bilateral meetings, has provided a platform for collaboration between software developers, financial institutions and the public sector.

My final take on this?

South Africa has a lot of catching up to do!

by: Rachana Bedekar

“Open Banking” and the fight for the customer

The revised payment service directive (PSD2) is an anticipated watershed for the banking industry. PSD2 compels incumbent banks to open up their data to third party service providers.


The revised payment service directive (PSD2) is an anticipated watershed for the banking industry. PSD2 compels incumbent banks to open up their data to third party service providers. The new regulation is profound because it shifts the locus of power away from institutions. With complete account portability, banks can no longer lock their customers in.

The premise of the shift in power is straight forward: the customers own their data not the institutions with which they bank. Although the traditional concept of owning the customer is defunct, competition for the customer relationship is ever greater. It’s here that FinTechs and their strong orientation towards offering winning customer experiences threaten bank’s siloed product centric legacies.


Although PSD2 amplifies the risk of disintermediation faced by banking incumbents, it also presents opportunities. After all, banks will have the same access as FinTechs to customer account information residing with their banking rivals.

One such opportunity exists for corporate banks, whose clients are typically multi-banked. Corporate banks have an opportunity to launch their own account aggregation platforms. Aside from offering a consolidated view across multiple bank accounts it is also possible to offer tools that help clients develop consolidated cash flow forecasts. The tools and analytics can enable corporate banks to pursue contextual cross-selling of term finance, consolidated account packages and other more bespoke products.

The unenviable task of balancing the scales

Financial Regulators have a tough job trying to regulate FinTech. On the one hand they are obligated not to stifle the FinTech revolution’s innovation that promises immense benefits to customers. In the same vein they cannot protect the interests of incumbents by overregulating FinTech startups.

On the other hand regulators must uphold their mandate and protect consumers and the financial system from predatory lending, money laundering, funding of terrorists, and fraud. A scandal at the world’s largest lending marketplace, Lending Club, is a case in point. At the heart of the scandal, Lending Club was found to have tampered with loan applications to make them more attractive to investors. Lying to investors is a serious faux pas for a leader in a new form of finance trying to establish its credibility with institutional investors. Predictably, the fall-out since the scandal broke has hurt marketplace lenders.

On the surface it appears that with PSD2 regulators may have tipped the scales in favour of FinTechs. While this may be partly true, it’s also widely accepted that the honeymoon in the grey area of lax regulation that FinTechs have enjoyed so far cannot not last forever.

Many prominent banking executives have expressed their desire for more stringent regulation to be imposed on FinTechs. As John Williams, CEO of Federal Reserve Bank of San Francisco said, “If it walks like a duck and quacks like a duck, it should be regulated like a duck.”

There are bound to be more twists in the tale as financial regulators grapple with the unenviable task of trying to balance the scales.

by David Krawitz