Thursday, 23 March 2017

How Bawumia & Co Could Actually Transform Ghana

If it was not so hidebound, the Bank of Ghana could make a huge difference, in the transformation of Ghana into an African equivalent of the egalitarian societies of Scandinavia.

During the 2016 election campaign - when he was at his 'spellbinding-best' dazzling many of our mostly unthinking educated urban elites - I often wondered how Dr. Bawumia, a man who clearly was a prisoner of the straightjacket of orthodox central banking thought processes, could make educated thinking-beings think that he was a messiah coming to make Ghana prosperous within four years: after regime change on 7th January, 2017.

More to the point, the question is: Will Bawumia & Co adopt the ideas of the UK's Positive Money Movement (same as those of the International Monetary Reform Movement (IMMR) incidentally), if those ideas are made known to them?

If yes, then some of us will have some hope that they might actually succeed in transforming Ghana by the end of their four-year tenure - by the opening of blockchain underpinned digital accounts at the Bank of Ghana for every Ghanaian citzen: into which digital money will be credited as and when needed for meeting their basic needs and  to finance their small enterprises.

Blockchain technology will play a key role in the creation of digital money by central banks globally - and will underpin the financial ecosystem that will bring about the transformation of Ghana into a more equitable and fairer society in which  all hardworking citizens live well: because those willing to apply themselves want for nothing in terms of the basics of modern life.

Today, we are sharing a culled Forbes.com article by Laura Shin entitiled "Central Banks Explore Blockchains: Why Digital Dollars, Pounds Or Yuan Could Be A Reality In 5 Years".

Perhaps it ought to be read by Bawumia & Co; all the players in Ghana's financial services sector; and every politician in Ghana - all of whom must also bone-up on the ideas propagated by the IMMR and the UK's Positive Money Movement.

Above all, one hopes that this blog's many brilliant young readers will enjoy reading it.

Please read on:


''Personal Finance #​NewTech
Oct 12, 2016 @ 03:03 PM
Central Banks Explore Blockchains: Why Digital Dollars, Pounds Or Yuan Could Be A Reality In 5 Years

Laura Shin


Contributor

I cover Bitcoin, blockchain, fintech, personal finance and career

Opinions expressed by Forbes Contributors are their own.

Last Wednesday, about 150 central bankers from 60 countries around the world convened at the Federal Reserve Bank of New York for the 40th anniversary of its annual central banking seminar, a private event titled “Policy Implications of Persistent Low Inflation and Rates.”

Economic and financial luminaries such as economist and Harvard president emeritus Lawrence Summers, founder of the world’s largest hedge fund Bridgewater Ray Dalio and the People’s Bank of China deputy governor Yi Gang gave talks on the low-interest rate, low-growth environment and monetary policy around the globe.

And then there was a presentation, “The Digital Asset Economy,” by a different type of financial player: Adam Ludwin, chief executive officer of Chain, a San Francisco-based startup helping enterprise clients such as Visa, Citi, Nasdaq and other giants of finance capitalize on blockchains, the technology behind Bitcoin.

Like the other speakers Ludwin was thinking about ways, post-financial crisis, the financial system could become more stable, but he was offering policy makers not a new idea for regulation but a completely different type of tool for helping to prevent or manage another crisis: technology in the form of blockchains.

“It looked at first like Bitcoin didn’t have any relevance to this world [of the traditional financial system and the financial crisis],” said Ludwin in a treehouse-like conference room floating in Chain’s Hayes Valley high-ceilinged offices. “It’s slowly but surely working its way back to the same objective, which is financial system stability. In particular, blockchain networks increase transparency -- giving policy makers real-time visibility into transactions of all kinds — payments, capital markets, etc.”

Blockchains use a blend of cryptography and ledgers spread out over multiple computers to create consensus among various players about who owns what. The cryptography and lack of a single point of failure ensure security, and the existence of many copies of the ledger facilitates transparency and prevents tampering with the record. It’s also much faster and cheaper than using multiple ledgers and intermediaries. For instance, a traditional bank transfer can take three days domestically or a week or more internationally whereas sending a Bitcoin to the other end of the earth can be done in 10 minutes. The technology was first seen as a breakthrough for payments, in the form of Bitcoin, but is now recognized as having applications in many other financial services and products such as self-executing contracts, micropayments or tracking the provenance of luxury goods, as well as in healthcare, government and digital rights management for artists such as musicians and writers and more.

This idea of putting the fiat currencies that people use day in and day out on blockchains has been percolating in the minds of central bankers from England to China. Blockchains were discussed back in June at a blockchain- and fintech-focused forum hosted by the Federal Reserve, the World Bank and the International Monetary Fund and attended by central banks from over 90 countries. Last week, in a speech at the Institute of International Finance Annual Meeting, Federal Reserve governor Lael Brainard said the board will be issuing a paper on blockchain technology’s applications in finance and that blockchain, “may represent the most significant development in many years in payments, clearing and settlement.” And central banks of countries like England and China have have talked about issuing their currencies in this new medium, while Canada went as far as testing what they called CAD-Coin.

As Bitcoin has begun to shed its reputation as the criminal’s currency of choice, enterprise firms ranging from Microsoft to IBM to JPMorgan Chase to Visa to Nasdaq are well into a race to adopt blockchain technology to make financial services’ processes more efficient and offer products not previously possible. But while many believe this revolution will come to central bank-issued currencies in the far distant future, Ludwin said it’s already starting to happen.

“A lot of times you hear, ‘10 years from now, maybe one government will issue their money on a blockchain,’” he said. “I don’t think it’s 10 years. I think it’s within five, for sure.” Part of it is driven by the private sector enthusiasm, said Ludwin, whose company has partnered with incumbents such as Visa, Citi, Nasdaq, Fiserv, Capital One, Fidelity, State Street and others: “The private sector projects we’re working on anticipate and are eager to have a central bank currency as a feature in the long run.”

Chain has been talking with about a dozen monetary authorities around the world since Ludwin's speech at the Federal Reserve event in June. He said policy makers are “getting in on the ground floor of the next financial infrastructure system, so they’re not playing catchup like they typically are. They’re forward-thinking. The fact that Lael Brainard is talking about blockchain now — they see this technology coming, they want to sit at the table, they want to be observers on these networks, they want to be ensuring that these networks get built from the ground up in a way that benefits the economy.”

The NY Fed declined to comment on the private event, but Ludwin, who’s previously been through a similar wave of interest with the established financial institutions who are now Chain’s partners, offered his thoughts on why central banks are being so forward-looking, how blockchain-based fiat currencies could help our economies and what these trends could mean for the everyday consumer.

How Blockchains Could Help Central Banks

As Dalio pointed out in his presentation, economies around the globe, from Japan to Europe to the United States, are running up against the limits of what traditional monetary policy can do. Traditionally, central banks can, say, increase the money supply to lower unemployment or stimulate consumer spending, or, on the flip side, tighten growth in the money supply to rein in inflation by doing things like buying or selling government bonds or raising or lowering interest rates. But, he said, some governments have pushed these techniques almost as far as they can go. For example, interest rates are already near their maximum lows.

Ludwin also notes that central banks are becoming more limited in their ability to influence banks to loan more now that many of those activities have moved over to what is called the “shadow” banking system — financial services providers that provide credit and products not subject to regulatory oversight such as hedge funds or credit default swaps. The Financial Stability Board, in a 2015 report looking at jurisdictions that cover 90% of global financial system assets, estimates the shadow banking system accounts for between up to 40% of total financial system assets in 20 of those jurisdictions and has grown over the last several years.

Hence, the appeal of blockchain technology. In times of crisis, everyone tries to withdraw funds at the same time, causing a credit crunch. But what exacerbated the 2007-2008 financial meltdown was the fact that complex financial instruments like credit default swaps “made it hard to figure out who owed who what,” said Ludwin. “There were these fundamental questions — we have these toxic mortgage assets. Where are they? On whose balance sheet? How do we know how many there are?”

But because a blockchain enables real-time visibility into how credit is being created, the assets in circulation and their location, and how far they’ve been lent out, it could help policy makers prevent another crisis, rather than react to one after the fact. It would also reduce the overall transaction time for more complex financial instruments, some of which are so complex they can take weeks to process. During a crisis, these take longer to unwind, worsening the crisis.

In the long run, central bank digital currencies could even enable more unconventional strategies to be used in monetary policy, such as “helicopter money,” a way of putting more cash in the hands of consumers by printing more and distributing it (the name comes from originator Milton Friedman’s analogy of a helicopter dropping cash from the sky into a community). “Right now, for the Federal Reserve to get money to you, it has to go through the banking system,” said Ludwin. However, he said, “you could go to a website and register and say, ‘I want to receive my helicopter money and create a wallet wherever — with Facebook, Google, your bank.’ Money could be issued directly to individuals and businesses.”

What A World Of Central Bank Digital Currencies Might Look Like

In a blockchain system, funds are held in addresses and users have keys to those addresses, thereby giving them control of those funds. “Every transaction on our protocol is a program, so if I send you money on the network, I’m writing a transaction that says, only Laura’s keys can spend this from here on out … or only Laura’s keys on Wednesday of next week can spend this,” he said, referring to the protocol Chain developed with partners such as Visa, Citi, Fidelity, Capital One and others and released in May.

They keys can be used to replicate current processes for handling cash. For instance, when the central bank takes cash out of circulation, it actually shreds bills (Ludwin said his goodie bag last Wednesday contained shredded money). A blockchain can do the same. With Chain’s protocol, one would write a program that essentially sends that money to an address without a key.

As for who owns the network, in the current system, if you go to Chase to deposit $50 cash, Chase holds that money, which was issued by the Federal Reserve, on its network. But Ludwin said you could imagine, instead of banks running the network, Fedwire, the current system for electronically settling payments between member banks, being reconstructed on a blockchain for which banks hold keys to make transfers.

That could then lead to non-financial institutions being custodians of such currency. “With small enough amounts, you don’t need a bank,” said Ludwin. “Could Google, could Apple, could Facebook be holding small amounts of digital cash? Does that change the model of who a custodian is or could be? And the answer is yes.” It could also open up more avenues for peer-to-peer lending, reducing consumers' reliance on banks for loans.

Over time, smartphones could manage identity (to solve for banks’ requirements around know-your-customer and anti-money-laundering regulations) and, therefore, one’s keys. “Smartphones are getting smarter when it comes to managing cryptographic material,” said Ludwin. “The newest iPhones are getting pretty good at this. We would trust the secure element in an iPhone to hold, not the only key, but one of a few.” Or, he said, it could be enabled to hold small amounts of money or things like loyalty points. The identity of the owner could be authenticated via the thumbprint.

Challenges

One of the biggest questions will be around privacy, since the data is held on a ledger that’s shared. “Whereas before, regulators were always chasing down reports and trying to get access to data and figure out where assets are, the inverse problem will be true in the future,” said Ludwin. “We’ll actually need for regulators to think about self-regulating and ensuring privacy for participants on the network if they want adoption of central bank digital currency.” Noting that there’s a fear such systems will force individuals to give up the privacy they have with cash, he said whether or not that turns out to be true depends on how a new system is implemented.

So far, one technological solution that a few firms are working on, called zero-knowledge proofs, could enable selective disclosure, enabling only the relevant regulators and counterparties to a transaction to have access to that data. “It’s like a computer that can tell you that some number in this black box plus some other number in that black box are equal, without knowing one says 2+2 and the other says 4. It’s a way of blinding computers, so people can read the underlying data but at the same time, letting computers do the validating of transactions that are required for a shared network to function.”

How A Central Bank Digital Currency Could Emerge

Noting that it was about a year and a half ago when the private sector began requesting blockchain prototypes but that soon, these projects will launch to customers, Ludwin said, “I’m finding that policy makers and central bankers are as interested in this topic now as the private sector — their understanding of it is about 12 months behind where the private sector is, but they’re being very smart and thoughtful about where this could have impact and how they can participate.” He believes the cycle beginning with pilots, this time for central banks, will get going in 2017.

The two types of governments he sees interested are what he called “challengers and incumbents” — those in emerging economies in places like Asia, and then giants like the U.S., U.K. and Canada, who are looking to upgrade antiquated systems. Some are exploring it because they are wondering if being a first-mover issuer of central bank digital currency could confer a competitive advantage for their currency, and others are looking into it as a tool for improving financial system stability and preventing crises.

Either way, for Chain, it wouldn’t be that different from the work it’s been doing with its enterprise clients. “The main idea of a blockchain is it enables asset issuers to issue those assets into a new medium, and when it comes to money, the issuers are the central banks," said Ludwin. "We get excited talking to issuers of all kinds. That means traditional investment banks because they’re issuing corporate securities, sometimes it means big companies because they’re issuers directly of their own securities, Nasdaq Private Market who are issuers of private market securities, brands who are issuers of loyalty points. So one of our key constituents is always issuers. It may seem like central banks — that’s so crazy. But it’s not. They’re just issuers of a certain type of money and asset, which is government-issued currency. In a way, the U.S. Federal Reserve and Delta are similar in terms of our technology. Delta is issuing points, the Fed is issuing dollars. They’re just assets on a network. Obviously, theres’a a lot of difference between the two, but from a tech perspective, they’re facilitating the same basic need, which is modern infrastructure to secure and move assets.”

End of culled article by Laura Shin who contributes articles to Forbes.com - which incidentally is not responsible for the opinions of its contributors.

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