The Future of Money: The Developments You Need to Know this Week (Issue 12 - 19 September 2020)

Dear Friends,

Welcome back to my weekly newsletter where I share some of the major developments on the future of money that you need to know about!

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If you enjoy this content, you will also love what I post on Twitter (@HenriArslanian) and the library of videos on my YouTube channel.

1. The IRS Paying a Bounty for Cracking Privacy Coins

The US Internal Revenue Service (IRS) will pay out up to $625,000 for anyone who can crack Monero, one of the most popular privacy coins. 

Unlike popular crypto assets like Bitcoin and Ethereum, where addresses can be traced back to wallets and crypto exchanges to reveal the user’s identity, Monero operates in near complete darkness.

It does so by using three different privacy technologies (namely ring signatures, ring confidential transactions and stealth addresses) that hide the sender, amount, and receiver in the transaction.

It’s no wonder that most regulated crypto exchanges refuse to list privacy coins.

With the lack of traceability and transparency, many fear that privacy coins could become more and more popular as a vehicle for illicit activities around the world. 

For example, recent reports indicate that North Korea, in an effort to circumvent international sanctions, has boosted its Monero mining operations at least tenfold since May 2019.

Whilst chain-tracking firms have long worked with government agencies to unearth criminal activity on popular crypto networks like Bitcoin or Ethereum, even they’re having a tough time unlocking Monero’s privacy mechanisms. 

So the IRS is now turning to private contractors and individuals for help, hoping that someone out there can develop a tool that will provide identifying information for Monero wallet users.

A development worth following!

Tweet of the Week

2. The Composability Risk of DeFi Financial Legos

DeFi lending protocol bZx was attacked this month, losing $8 million due to a faulty code (although this amount was later recovered).

The hacker was able to exploit a flaw in bZx’s smart contracts to duplicate assets and increase their iToken (bZx’s token) balance.

As DeFi platforms rely on smart contracts and there are no centralised entities (no call center to help you block a transaction!) the code behind these smart contracts needs to be extremely sound. 

This is particularly the case as one of the most powerful and attractive features of decentralised finance is its interoperability, or what many call the permissionless composability, an issue that I touched on in last week’s newsletter.

Composability is a design principle that allows various different components within a system to be integrated together, thus allowing any new DeFi application to combine any existing DeFi products to form entirely new DeFi products. 

This is why DeFi is often referred to as financial legos, as this model allows you to combine any number of pieces together to build the creation of your choice. 

Yet whilst this system certainly has plenty of benefits, it only takes a single crack for one of the Lego pieces upon which the others are built for the entire structure to crumble and fall to pieces. 

With the growing wave of excitement and enthusiasm for DeFi, we need the industry to be more active and diligent in addressing this issue moving forward.

We need the lego blocks to work!

Money Quote of the Week

“Someone stole all my credit cards, but I won’t be reporting it. The thief spends less than my wife did.”

Henny Youngman

?Picture of the Week

You have to admire the originality of the Bitcoin Association of Hong Kong for its recent wave of Bitcoin awareness ads, including those on the typical Hong Kong trams and a bus stop in front of the headquarters of HSBC….

3. The Dream of the Digital Euro?

Europeans seem to love cash.

Across the EU, cash continues to remain the most commonly used means of making small retail payments, with cash payments accounting for 73% of physical retail payments last year.

Some of the large countries such as Germany, Spain and Italy even use cash at rates that are around or even well above the euro area average. 

Earlier this year, as COVID-19 induced panic began to set in, the weekly increase in the cumulative value of banknotes in circulation throughout the Eurozone nearly reached a historic peak of €19 billion, according to the European Central Bank (ECB).

It also reflected the age old tradition of cash hoarding during times of crisis.  

Source: European Central Bank

But interestingly enough, nearly half of surveyed consumers state that they prefer to pay digitally, with interest in digital payments rapidly increasing over the course of the ongoing COVID-19 pandemic. 

This was one of the reasons mentioned by the President of the European Central Bank (ECB), Christine Lagarde, when she reignited the debate on whether or not the EU should launch its own central bank digital currency (CBDC). 

The ECB also wants to continue to maintain access to central bank money, striving to ensure that citizens across the Eurozone have access to banknotes at all times. 

In the ECB’s view, a digital euro would act as a complement, not a replacement, for cash. 

As Lagarde noted in her address, “While helping to address the consequences of a decline in the use of cash, a digital euro would also ensure that sovereign money remains at the core of European payment systems.”

However, the central bank remains fully cognizant of the risks involved with introducing a CBDC.

One potential risk is that CBDCs could spark and accelerate a run on banks throughout the Eurozone during a crisis, with depositors taking part of their cash holdings from banks and moving them into CBDCs.

As Lagarde outlined:  “...if significant amounts of bank deposits move into a digital euro, that could fundamentally and radically reshape the role the banking sector plays in financing the economy, which would have broader implications for how we at the ECB implement monetary policy and support financial stability.” 

The ECB recognizes that the world is changing, and that it wants to proactively be ahead of the curve. 

The CBDC space keeps getting more and more interesting with many of the "traditional" players now pushing for change! Watch this space!

Welcome to the Crypto Capsule GIFs!

If you like your Crypto Capsules, then you will hopefully love the Crypto Capsule GIFs that I just launched this week!  

They are all available on my GIPHY page: https://giphy.com/Henri_Arslanian/ but you should be able to find them directly in WhatsApp or Slack using the GIPHY search function.

Hope these GIFs will come in handy when someone is taking more than 60 seconds to explain something, your colleague goes on another tangent during a conference call or simply make you laugh!

My Upcoming (Virtual!) Speaking Engagements

24 September - UBS Live Global Family Office Tech Connect Series

25 September - Global Monetary War Game 2020

6 October - Futurism Forum

6 Oct  - FinTech South

Enjoyed this content? Make sure to subscribe or share it with a friend! A new Future of Money newsletter will be in your inbox each Saturday!

See you all next week!! 

Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with.

Who is Henri?

Passionate and focused on the future of finance and money, Henri Arslanian is the PwC Global Crypto Leader, the former Chairman of the FinTech Association of Hong Kong and an Adjunct Professor at the University of Hong Kong, where he teaches the first FinTech university course in Asia.

Henri advises many of the world’s leading crypto exchanges, investors, financial institutions and tech firms on their FinTech and crypto initiatives as well numerous governments, regulators and central banks on Fintech and crypto regulatory and policy matters.

 With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author and is regularly featured in global media, including Bloomberg, CNBC, CNN, the Wall Street Journal and the Financial Times.

Henri was named by LinkedIn as one of the global Top Voices in Economy & Finance and is the host of the FinTechCapsules? and CryptoCapsules? social media series.

Henri was recently named by Onalytica as the #1 most influential individual on Finance globally on LinkedIn out of 50k+ individuals working at the top professional services and management consulting firms in the world. 

Chambers Global also named Henri the “highest profile FinTech consultant in Hong Kong” and Asian Private Banker awarded him the “FinTech Changemaker of the Year” award.

Henri’s latest book, The Future of Finance: The Impact of FinTech, AI and Crypto on Financial Services, published by Palgrave Macmillan, was ranked as one of Amazon’s global top 10 best-sellers in financial services and was recognized as one of the “Best FinTech Books of All Time” by Bookauthority.

Before joining PwC, Henri was with a FinTech start-up and previously spent many years with UBS Investment Bank in Hong Kong. Henri started his career as a financial markets and funds lawyer in Canada and Hong Kong.

You can learn more about Henri on his website (www.henriarslanian.com) and you can reach him at [email protected]