Valuable Advice from Workshop 3
The Future of Money
Held on Thursday 8 August 2019
While cash is in retreat in New Zealand, it is still in a strong position in other countries. Nonetheless, digital currencies continue to evolve and gain ground. While some argue that they have no intrinsic value, in that respect they are no different to traditional money, which also relies on enough people believing in its value for it to be exchanged for goods.
So do digital currencies offer enough to push cash aside over the long term? To answer that question, you first need to recognise that not all digital currencies are alike, and each has its own strengths and weaknesses, with new variants often appealing to different markets.
Underlying all digital currencies, however, is an independent existence exemplified by the decentralised blockchain model on which cryptocurrencies generally rest. While digital currencies have the potential to revolutionise society, current financial regulations will either hinder them or get washed away as the world embraces them. It’s a moot point which way things will go in the long term, but for the foreseeable future it seems that both traditional and new currencies will co-exist, albeit not entirely happily.
Liz Maguire, Head of Digital and Transformation, ANZ
ANZ is the largest bank in New Zealand, and Liz’s team is responsible for New Zealand’s largest digital customer base, twelfth biggest website and most popular mobile banking app.
Mark Pascall, Executive Director, Blockchain NZ
Mark is co-founder of The DAO Agency which aims to create decentralised autonomous organisations. He co-founded blockchainlabs.nz and is on a mission to put New Zealand at the centre of the blockchain disruption.
Steve Gordon, Head of Banking, Reserve Bank of New Zealand – Te Pūtea Matua
Steve Gordon’s team is responsible for currency and electronic payment systems and he is leading the bank’s Future of Cash – Te Moni Anamata project.
CHAIR: Jennifer Tunna, Principal, Lowndes
Jennifer is a lawyer specialising in finance, restructuring and insolvency. Since 2013, she has been recognised as an ‘Associate to Watch’ by Chambers and Partners.
WHAT THEY SAID
Jennifer Tunna says cash still has a lot going for it
Jennifer introduced the session saying cash is free to use, readily available, confidential, it cannot be hacked, it is reliable, and its infrastructure is well developed. Cryptocurrencies, on the other hand, present most of the risks central banks work to reduce. Facebook’s Libra may be an exception that could provide a vehicle for the mass public to become involved in the cryptocurrency world and fast disrupt traditional financial systems.
For now, cash remains the most widely used form of payment around the world. Africa is the most reliant on cash, Oceania has the lowest cash dependency.
Many European countries remain cash transaction dominant but there are large differences between them, and certain countries such as Sweden operate only 20% of their transactions in cash. Although cash transaction volumes globally are increasing, electronic payment volumes are increasing faster.
Where do banks fit in all of this? she asked. “And as individuals and businesses, should we get on board with this change – indeed, how much choice do we have in the matter?”
Steve Gordon says the death of cash has been greatly exaggerated
Steve laid a fairly safe bet that few people in the room would remember the last time they bought a coffee with cash. He said as cash use decreases, the unit cost for handling cash increases which leads many people to think cash would not be missed or mourned.
But he predicted cash still had a long future, partly because of the work central banks do to maintain stability and faith in its value (New Zealand has a praiseworthy counterfeit rate of less than three parts per million), but also because it still works for so many people.
He says some sectors of society still run on cash. Even in New Zealand, with its high rate of digital transactions, the cash machine in Murupara, removed after it had been repeatedly targeted by thieves, had to be reinstalled after (law-abiding) locals protested at having to drive to Rotorua to get money.
This utility is recognised by societies around the world that have outlawed cashless businesses – the city of San Francisco is the latest – because they were effectively discriminating against low income residents.
“If we sleepwalk into a cashless society, many New Zealanders will be left behind,” says Steve.
Cash in circulation in New Zealand, currently $6.7bn, continues to rise at around five to seven percent a year. And higher denomination notes continue to flow overseas, mainly to Asia; a trend mirrored in the US, UK and Canada, Steve said, although no-one knows exactly why.
Meanwhile the Reserve Bank is keeping a close eye out for trends, and on the disruption being caused by digital currencies and Facebook’s Libra – and its implications for security, sovereignty and the tax base. Is there a business case for central bank digital currencies? Steve said some countries argue there is; others are equally adamant there is not.
Steve concluded: “I think we are going less cash, rather than cashless.”
The Reserve Bank is seeking input on the future of cash and consultation is open until August 31.
Mark Pascall explained cryptocurrencies are not Ponzi schemes; really, they’re not
In 2018 World Bank chief, Jim Yong Kim, said cryptocurrencies are Ponzi schemes, but Bill Gates reckons “Bitcoin is a technological tour de force”.
Mark agrees with Gates. It is a more efficient value exchange and it has two important properties, he said. Instead of having one ledger of transactions, as in a bank, records are decentralised and distributed, making them almost unhackable. You’d have to hack 51 per cent of, say, 30,000 computers holding a record (or part of it), at the same time. And the second property is that governments can’t control it. Governments can control people by controlling money, said Mark.
But cryptocurrencies are not a workable replacement for traditional currencies if their value fluctuates wildly, as Bitcoin’s has done (although the long-term trend is relentlessly positive). Enter currencies with properties built into them, like Tether and Maker, that make them stable.
Mark was not a fan of Facebook’s Libra and encouraged people to read his blog about it. It welcomed in a coterie of other new tech firms to a seat at the table – if they could command sufficient billions. He said it was “quite a scary place.”
Mark said Bitcoin proved you could decentralise data. Other platforms, like Ethereum, were now decentralising business rules. He said you could set up smart contracts which overcame the need we currently have for trust in business partners. You would be wary of handing over credit card details to a new gambling website, for example, but if it used a proven blockchain contract, where the rules can and have been examined, punters would not need to trust the individuals running the website.
“Any centralised system that clips the ticket can be replaced,” said Mark.
The latest big development in blockchain is the rise of tokens as a way of recognising value. “A token can have many faces,” said Mark. It can function as equity, a currency, a reward, a digital asset, a right, or one of many financial instruments such as bonds or derivatives – which is also its biggest challenge. Financials rules and laws are not written to handle things that hop from being one thing to another, or which can be a lot of things at the same time.
Mark also decried some New Zealand banks’ shutting of accounts trading in cryptocurrencies. He said blockchain could fundamentally change how society operates. New Zealand has the opportunity to be a leader in this fluid situation and it was his mission to help the country catch that wave.
Liz Maguire detailed five trends in banking
The first change, said Liz, was that the way we pay is going to change. Even if cash is not on the way out, there are going to be more person-to-person payments and the days of using a bank branch for payments are almost over already. Less than one percent of transactions – in cash and cheques – is now going through branches. “What is going to win are the things that remove friction for customers,” she said. Witness how contactless ‘paywave’ transactions already make card ‘dipping’ terminals seem such an imposition.
The second trend is ‘open banking’ which recognises that customers own their own data, not the banks, and that banks have to share it with third parties – properly accredited – when the customer wants it shared. For example, sending a customer’s transaction details to a cloud accounting provider.
This gives rise to a third trend, which is big tech companies like Apple and Amazon wanting to own the user interface for banking. Apple has launched the Apple card. Goldman Sachs is handling the back end transactional detail while Apple concentrates on the interface, and the access that gives to valuable data on behaviour. “The place you may see your data is on a third party that is not a bank.”
She said the trend to these alternative providers is stronger overseas, as their banking systems are much less integrated. Retailers in some countries need a host of terminals to accept different types of card payments. Big Tech have one advantage over New Zealand banks in that they are borderless. But they have a trust issue. Major financial institutes are highly trusted while big tech companies are at the other end of the scale, below supermarkets.
The influence of blockchain and AI is the fourth trend, as they can make transactions more personalised, with less paperwork and less friction. She cited Lygon in Australia, a blockchain-based platform that transformed a laborious paper-based bank guarantee process which, for example, a retailer taking up a tenancy in a mall needed. It made the process almost instantaneous. She said AI could produce a lot more tools for helping people predict and manage spending; for example, analysing spending and suggesting other power companies with cheaper deals for that usage profile. “A lot more around improving working capital and helping you save money.”
The fifth trend was in customer service where technology, like the bank’s new chatbot, Jamie, provided face to face customer service in a naturalistic way. She compared it to a grandmother whose life was transformed by using Siri on her Apple TV. She could say ‘Hey Siri I want to watch Downton Abbey,’ and it would play, without her having to juggle three remotes.
She said businesses should meet customers where they are, or want to be, in the bank’s case, getting out of the branches, to their homes or place of work, where they could build a relationship and offer frictionless services that meet customers’ needs, not the business’s.
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