A guest contribution from Marcus NasarekIT security analyst and since the 1990s has held various positions in the payment and banking industry
It is worth remembering that Bitcoins were created in response to the financial crisis. In a crisis in which highly regulated, renowned global financial institutions have driven the global financial system to the brink of the abyss with their speculative financial products. As a result, the zero interest rate policy of the European Central Banks permanently devalues deposits made by bank customers and also devalues financial products such as life insurance policies that are classified as safe. An end to this situation is not in sight.
Against this background, it would be better to question general statements that crypto-currencies fundamentally pose a threat to the stability of the financial system once too often than too little. It is also important to look closely at which players are calling these statements into the market and for what purpose.
When the position paper of the banking association[1] came out, its title promised that private banks in Germany are open-minded about a digital euro beyond Libra. A such openness of the banks is enormously important, since the German and European financial sector is in the process of catching up technologically with the new developments driven by the crypto industry to loose.
While globally active banks such as JP Morgan with its Interbank Information Network are now using the block chain technology productively, German banks, with few exceptions, are still looking for the role they want to play in future crypto ecosystems. they obviously have difficulties seeing real added value in the application of block chain technology. So far, I have had the impression that banks are looking at a digital euro with scepticism, if not rejection. The title of the position paper is therefore all the more gratifying, as it now sounds like an atmosphere of optimism.
The disillusionment follows the first position when reading and intensifies in the following ones. This is because the paper does not provide any arguments as to why a digital euro is needed and what benefits this could bring to the banks’ customers. Instead, there is talk of danger and the majority of positions formulate the desire for more regulation.
A regulation that apparently Facebook representative of the other American technology companies from using their technological know-how to not to be able to use the advantage without being asked. This is surprising, since the private banks otherwise tend to support market-liberal theses.
Moreover, the paper does not explain the specific difficulties in the market and why banks have a privileged position in the creation of a new crypto-based payment system. Rather, with reference to the need to strengthen regulation, to take account of new developments as long as until the financial industry in Europe catches up has. A prankster who would call this demand “protectionism”. Rather in the more than 20 pages of explanatory notes, the following are given priority “German Angst” put into words.
The positions reflect a dramatic state of affairs: without showing why it could be done better, demands such as stricter competition law, more regulation and more data protection are used to slow down other market participants. In addition, potential competitors should be deprived of the competence to create new innovative payment paradigms. Banks want to be legally protected and responsible for the pace of crypto-based innovations – in line with their potential – without the annoying interference of the competition authority (see position 6).
Measured against the few who, as a bank, are seriously looking for new applications, this position seems doubly surprising. Because are banks in a position to understand the consequences of these demands and overlook? And above all: Is the nature of decentralized account management – the translation of the term “Distributed Ledger Technology” – actually in of all consequence?
“Are banks even able to understand the implications of these demands?”
My scepticism is perhaps illustrated by the example of position 3: “The private banks in Germany will make their contribution to a sustainable innovative monetary system. For this purpose a programmable digital euro on an account and cryptographic basis and ensure its interoperability with scriptural money. The prerequisite for this is that a common pan-European payment traffic platform for the programmable digital euro.”
Basically, the programmable account is acknowledged here as a future innovation. Programmable means that the account can be specified under which conditions transactions are executed. This is essentially the idea of a Smart Contract applied to existing bank accounts. Later on, it should also be possible to create a crypto-euro that brings the rules for its own processing to the payee. But why is a Europe-wide payment traffic platform necessary for this? And why “platform” and not “ecosystem”? This is because the deposit of conditions as to when which transactions are to be carried out from which account affects first and foremost the bilateral customer-bank relationship.
This idea would have worked as an innovation 15 years ago and fits well into the central account model. If banks really wanted to give their customers this option, it could have been implemented long ago – completely independent of cryptosystems. To call it an intermediate step today implicitly means that the economy should wait until banks come to the market with appropriate solutions at some point.
The implementation of the SEPA Direct Debit Schemes is a good example of what banks are actually willing to put into practice: for example, customers already have the legal right to set conditions for the processing of direct debits on their account: they can limit the processing to a certain amount or a certain frequency or both, suspend processing for verification purposes for mandates without refund rights and block all direct debits initiated by one or more named creditors or authorise direct debits initiated by one or more named creditors only. During the self-test I had not found such settings in the online banking and on request my bank asked me to send a fax with my rule requests.
In the corporate customer sector, defining conditions for processing payments has long been possible in the form of a paper battle at some banks. Blockchain technology would already be available to everyone and industrial customers could formulate smart contracts for managing their accounts themselves. The core of the matter is that the business logic is embedded in the Smart Contract and is aimed at the underlying transaction. To artificially establish a control function for the bank here would mean making the bank a bottleneck for innovation. Moreover, it has always been the credo of the banks not to get involved in the underlying transaction. An embodiment of the basic business are for example electronic invoices.
A smart contract could automatically trigger the payment order when the delivery has been made and the contents of the invoice correspond to the corresponding order.
The core demand of the banks aims at the central account management to maintain. The block chain or distributed ledger technology but will only develop its potential in a digital economic structure if the accounts are managed decentrally and the business logic is defined between agreed with the participants at the level of the underlying transaction and then conditions can be included in transaction processing. The Central Role of the Bank as an account service provider and processor of Transactions are simply lost. At most, it needs a Interface to a state-regulated currency. This could are in principle issued directly by a central bank.
What role then remains for the banks ? In any case, the role of the lender. However, since the loans granted are also deposited with the customers’ deposits, the question arises where these deposits come from when they are no longer needed as a liquidity reserve for payment transactions. But even today, a bank must make the deposit business attractive for its customers if it wants to use these deposits as leverage for the lending business, taking into account the fixed interest rate. Thus, cryptosystems could also be seen as a driver for innovation in the deposit and investment business.
In the end, a stale aftertaste remains after reading the paper. Yes, the economy needs at least one digital crypto-based payment system. Yes, legal certainty, fair competition and consumer protection are important. But rocket technology is unlikely to become one when banks start using digital control panels.
For example, when it became clear in 2011 that the train in e-commerce for banks was so was as good as gone, a joint banking initiative should make it …to fix it. The resulting PayDirect was able to operate despite political tailwind, of many good people and enough money but not the backlog again catch up.
All the energy and attention of the participants was exclusively directed inwards. Not the customer or the cooperation with others solutions, perhaps even with technology providers, but the differentiation were the focus of attention. That’s not how catching up works. And this is how it works not a digital ecosystem. 
It would be much better to give more competences to the industry in order to to work on solutions that the market really needs. The understanding for global networks have long since arrived there. And the strategic focus on Collaboration instead of confrontation helps all participants in Positioning in the global market. In an ecosystem, everyone should focus on concentrate its strengths instead of trying to turn its competitors out brake. These insights would help banks to play a true partner role in the their customers, whose added value can be a lucrative business Business model justified.
So what exactly are the chances with regard to a crypto euro and what are the solutions that the world needs today to be fit for the market tomorrow? I have the following theses:
The world is a network.
While this insight has been a matter of course in the export business and transport industry since the 1980s, German banks today do not really care about the cross-border market of their medium-sized business customers and their presence in e-commerce. So the huge volume of $50 billion in fees alone in the global remittance business is left to others. A crypto euro would only get you as far as the European border, and that is simply not enough.
“German banks don’t really care about the cross-border market for their midsized corporate clients.”
The Internet is not German and also not European, so here is missing a user-friendly on- and off-ramp between different Fiat and crypto-currencies and a technology-based compensation of missing Legal certainty. Risk management is therefore a core competence of banks! This is already existing business, which is currently predominantly international crypto exchanges. Binance alone, founded in 2017, made a profit of $183M in Q3 2019.
A digital ecosystem is created through cooperation and cooperation are defined.
Crypto-based Systems are a consequence of cooperation and open-source projects. you enable cooperation at eye level and a consistent Task sharing. The role of the bank is reduced to that which others do not can do better. The account management and the execution of transactions need to be carried out in In the future no more central service providers. Nor do the agreements of Conditions for the processing of transactions. These are processes that the block chain technology on the customer side and its service providers take place.
Nevertheless some components are still missing here: risk and fraud management, a resilient monitoring with the corresponding reporting, compliance with sanctions provisions, the interface to supervision and the processes for Implementation of regulatory requirements for security, data protection and Compliance (in particular measures to combat money laundering and terrorist financing). These are all tasks that a bank can offer partners in the framework of a Banking-as-a-Service can offer. A partner network scaled much faster and more profitable than a monolithic “I do it all myself” approach.
Anything that can be set down in rules replaced by automation.
This is the success story of Smart Contracts, which not only automate certain processes, but also roles in the system. This inconspicuous development affects all payment systems in general, as they are ultimately used for payments between two parties, and today, without intermediaries, it is almost impossible to do otherwise.
If these parties could now easily determine the rules themselves, then on the basis of crypto-systems to agree on tailor-made micro-schemes. This micro-schemes are then better suited for the specific application than a transfer via the SEPA Credit Transfer Scheme, which is not even Splitting, automatic (partial) return transfer, pooling, Store&Forward and similar to this. So here is missing an easy to use system for Description of rules for the automation of transactions and the automated Account management.
The bank has no specific role here apart from an advisory one, and should not have one, as the variety of bilateral rules are defined in the context of the underlying transaction. In the retail sector, however, the bank could play a shaping role beyond its advisory role by reviewing and standardising the agreed rules.
The number of unbanked and underbanked is greater 1.7 billion and 1.5 billion respectively.
I use the term “underserved” to describe a much bigger picture than just the number of people without a bank account. Because if even in Germany all citizens, companies and administrations were happy with their bank accounts, direct banks would not be so popular and the term SME banking would not even exist. And technology providers would also have no incentive to constantly develop new offers for the oh-so-saturated payment market. In Europe, there is a huge market of cash users, family households, young people, self-employed people and social networks who can only meet their financial needs by taking a detour. I even go so far as to say that the current payment instruments and how they can be used are absolutely no longer suitable for everyday use.
You only have to organise a class trip once to find out how many intermediate steps have to be done manually. WeChat addresses this problem directly. Here, bilateral crypto networks can create a much better offer, as they can map social networks and all possible use cases 1:1 What is missing are user-friendly interfaces to the underlying technology, a link to real money (e.g. as e-money) and better user protection in terms of security and privacy. But, this is a question of supply and not of more regulation.
The account is becoming decentralized and needs new paradigms for deposit protection
Decentralized account management on a block chain means that customers no longer deposit their deposits in a central location. From the customer’s point of view, this is actually less revolutionary than it sounds, since customers already carry the means of identification for the bank account with them. It comes down to practically the same thing: Instead of being in the bank’s database, the account is in the crypto network and anyone who has or knows the means of identification for this account can carry out transactions. The customer also determines who, when and how to access it. However, the difference becomes visible if the access data is lost. At a bank, you can be re-authenticated and receive new access data for the account.
With block chain, the loss of the access data is equivalent to the loss of the account. However, block chain technology also allows fully automatic protection of the access means: multi-signature is the keyword that enables the cooperation of several parties or even machines for the release of a transaction or the granting of a new access means.
So what is missing are user-friendly Services for the backup as well as the recovery of access resources. That such a thing works, show services like Argent, ZenGo, Ledger Vault and many others. Instead of accounts, a bank could therefore hold access funds or support the restoration, i.e.: their role as personal to strengthen the customer’s trusted partner
It almost seems like a remake of “Video kills the radio star”. Clear you can follow a football match on a tube radio and experience the emotional Commentators’ descriptions are great entertainment. But the game with to see for yourself is even better. Crypto networks are the video among the radios. Therefore it would be participants – technology providers, regulators and banks – are good for the environment, not to focus primarily on the risks, but rather on an equal footing together with global view, the opportunities of cryptosystems are being fully and consistently use.
Author: Marcus Nasarek
Marcus Nasarek is Payment & banking expert with 20 years of experience in global payment systems, European regulation and digital business models. Originally a physicist, security analyst, bank lobbyist, ex-PayPalian and now CoFounder of eTonec to help shape the Blockchain & Crypto industry.
[1] https://bankenverband.de/fachthemen/digital-banking/programmierbarer-digitaler-euro/