Archive for the ‘Innovation’ Category
Why I think TheDAO is a Success
The usual plague of so-called “experts” have come out of the woodwork following today’s attack on TheDAO, to tweet, blog and bloviate their hindsight-informed opinions about TheDAO’s “failure” and the implications for the future of smart contracts (despite the fact that most of them barely can barely string together a coherent description of what a smart contract is, let alone write one).
I don’t view TheDAO as a failure. I view it as an experiment that has reached its conclusion. We learnt something important today – we learned that this particular configuration of a DAO doesn’t work. Future DAOs and smart contracts will be better because of what we’ve learned, from the specific bug that the attacker tried to exploit, to the insights we’ve gleaned into voting incentives and DAO governance. We’ve learnt a lot about the benefits of being able to upgrade smart contracts after they’ve been deployed, and the lawyers and regulators have plenty of food for thought and debate, with all the legal questions that have been raised by both TheDAO itself and the proposed use of a hard fork to return investors’ ether.
It’s very easy to criticise the Slock.it team but they got a lot of things right and it appears that, in the end, all TheDAO’s investors will get their ether back (albeit with the assistance of the Ethereum community in implementing a hard fork). That’s no mean feat and they deserve credit and respect for what they achieved.
Most experimentation and innovation happens in private, and all the wrinkles are ironed out long before the final product is unveiled. However, in this area – cryptocurrencies, blockchains, smart contracts and DAOs – the experimentation and innovation is happening in the open.Bitcoin wasn’t invented in a corporate R&D lab. Ethereum was funded by the venture crowd, not a venture capitalist. The downside is that we get to see how the sausages are made and any mistakes are public, but the upside is that anyone can participate, and the degree and pace of innovation – its velocity, for want of a better term – is far higher as a result.
If we want to reap the benefits of open innovation, we also have to embrace the downsides, including the experiments that we learn from, even when the outcome isn’t what was expected or hoped for; we have to applaud those who try, even if they don’t succeed; and, above all, we should elevate those who do above those who merely talk, tweet and blog.
I invested a small amount of money in TheDAO because I believe that the best way to learn is to get involved and put some skin in the game. If I never get the money back, it will have been a small price to pay for the amount I’ve learnt. If I do get it back, then I hope that I’ll have the opportunity to invest it in TheDAO v2 so we can have another try and see if we can’t learn a bit more.
Towards an Open Banking API Standard
Disclaimer: I am a member of the Open Banking Working Group (OBWG) and was involved in drafting the OBWG report. However, the thoughts and opinions presented here are strictly my own.
The OBWG’s report was published yesterday with the somewhat misleading title The Open Banking Standard. We’re a long way from a standard but this report is a significant step along that path. Its purpose is to lay out a roadmap for defining an Open Banking API standard that can achieve widespread adoption, and to put forward some strawman proposals, intended to generate discussion of their merits and weaknesses, with the objective of generating new and better proposals.
The OBWG’s work follows on from the Fingleton report, which looked at the potential benefits of banking APIs and open data, and HM Treasury’s public consultation on data sharing and open data in banking.
The OBWG was convened with three core objectives:
- Deliver a framework for the design of an open API standard in UK banking focussing on personal and business current accounts;
- Evaluate how increased levels of open data in banking can benefit consumers, businesses and society; and
- Publish recommendations in a paper by end of 2015 outlining how an open API standard can be designed, delivered and administered, alongside a timetable and implementation roadmap for achieving this
It’s important to note that this initiative is separate from – and has a wider scope than – PSD2. However, I would predict with a high degree of confidence that the functionality required to fulfil PSD2’s requirements will form part of the Open Banking API Standard, and I would not be surprised if the UK implements PSD2 by mandating compliance with the Open Banking API Standard.
One of the key challenges in coming up with such a standard is to figure out how banking APIs can be opened up to third parties while ensuring that consumers are adequately protected against fraud and banks aren’t unreasonably held liable for third parties’ failings. Currently, banks control the technology channels that their customers use to access their accounts electronically. Online banking is through the bank’s own website; mobile banking is through the bank’s own app. Liability for any losses rests with either the bank (if their security proves inadequate) or the customer (if they fail to take the necessary security precautions). Opening up banking APIs and granting access to third parties complicates that picture and banks are understandably wary.
The proposals presented in the report comprise a combination of provisions (including an OAuth-based authentication and authorisation model, and vetting and licensing of third parties) that represent a compromise somewhere between completely open access that would allow even hobbyist programmers to create apps that connect to banks’ APIs, and a overly-restrictive regime with requirements or costs that are too onerous for finch innovators and startups. One aspect that I’m a particular fan of is the idea that API functionality should be permissioned atomically, and that the security standards to which the third party will be held and the scrutiny to which they will be subjected should be commensurate to the level of access they wish to obtain. For example, a startup wishing to offer a personal financial management solution, which requires “read-only” access to accounts would be subject to less onerous requirements than a company seeking access to instruct payments from their customers’ accounts.
I have set up a mailing list to facilitate discussion of the report and future developments in this space. Instructions on how to join the list can be found here.
Fundamentally, I believe that the UK fintech sector will benefit hugely if we can make rapid progress towards an Open Banking API standard, and I believe that there’s an opportunity for the UK to take a leadership role, in the same way that it did in information security standards, with the adoption of BS7799 as ISO27001.
It’s entirely possible that neither the banks nor fintech innovators will be entirely happy with the report’s proposals. If so, then I think we’ve done a good job. Personally, I think it’s a significant step forward and I hope to remain involved at the next stage of establishing an implementation entity to take the concept forward.
Uber & London
Uber is often cast as the plucky upstart, taking on taxi monopolies and cartels on behalf of customers. Some cities artificially restrict the number of taxis. In New York, this drove the price of a taxi medallion to $1m in 2011.
In London, however, the number of taxis (or “hackney carriages”, to use the legal definition) is not limited. Anyone can become a licenced taxi driver, provided they meet the requirements. A prospective London cabbie must spend 3+ years learning the Knowledge (which literally causes their brains to grow bigger) , take an enhanced driving test, invest in a vehicle that meets specific requirements (including the ability to accommodate a wheelchair, and a 25-foot turning circle), commit (under pain of fines) to pick up anybody in the street who hails them if their yellow light is on, and agree to be subject to the fares set by TfL (Transport for London – the body that regulates transport in London).
In return, the government prohibited private hire vehicles (PHVs – i.e. unlicenced taxis/cabs) from picking up customers who hail them in the street or using a taximeter to calculate a fare based on time and distance. In effect, PHVs must be booked in advance and the customer must be able to agree the fare up-front.
Effectively, there was a social contract between London taxi drivers and the government. Taxi drivers had certain advantages over PHV drivers but they were also subject to more onerous licensing requirements. With no restrictions on the number of taxi licences issued in London, the laws of supply and demand dictate the number of black cabs on the streets, and customers get to choose what type of service they want to use.
Then Uber came along.
When Uber began operating in London, the London Taxi Drivers’ Association (LTDA) complained to TfL that Uber’s fares are calculated based on time and distance. TfL referred the matter to the High Court, where the case focused on whether the smartphone-and-app combination used by Uber drivers is a taximeter. The High Court decided that because the calculation of the fare does not happen on the smartphone, but on Uber’s servers, the smartphone is not a taximeter.
I’m not a lawyer but that seems like a loophole to me. To my mind, the real question is not whether a smartphone falls outside an archaic definition of what constitutes a taximeter, but whether Uber drivers should be allowed to charge a fare that is calculated based on time and distance. If the answer to that question is “No”, then the law should be updated to close the loophole.
However, if the answer is “Yes”, the government is effectively tearing up London’s taxi drivers’ social contract, and calling into question the economic viability of becoming a licensed taxi driver. Why bother spending all that time, effort and money if the rules mean that you’ll be operating at a disadvantage?
The worst-case scenario is that black cabs go from being a regular sight on the streets of London to an historical curiosity. That might suit Uber but I don’t think it would be a good outcome for the rest of us. Personally, I like to be able to flag down a cab (even when my phone battery is dead), secure in the knowledge that the cabbie’s done the Knowledge and isn’t just blindly following a satnav directions (which is the difference between getting home in 20 minutes versus being stuck in traffic on Pall Mall and Trafalgar Square for half an hour). I’d be quite happy if the cost of that is to require that Uber set the price of a journey in advance.
The outcome of the current public consultation being conducted by TfL should be a reaffirmation of the social contract with London’s licensed taxi drivers, and a regulatory regime that allows consumers to benefit from innovation, while preserving choice and ensuring that the quality of London’s taxi services doesn’t get dragged to the lowest common denominator.
UK Government Outlines Support for FinTech and Digital Currencies
Yesterday was a significant day for FinTech in the UK. Having previously made it clear that the government wants to make London the leading location for the FinTech and digital currencies sectors, the Chancellor, George Osborne, used the Budget to lay out more details of how the government intends to achieve that.
The Government Office of Science also released its Blackett review into FinTech, and HM Treasury published both their response to the call for information on digital currencies that they launched last November, and a policy paper outlining the government’s strategy for delivering competition and choice banking.
I highlight some of the key announcements from the Budget below.
Promoting competition is one of the FCA’s three objectives (the other two are protecting consumers and protecting financial markets) and, fortunately, its leadership fully recognises both the role that innovation can play in driving competition, and the fact that regulation can be a significant barrier to innovation. Project Innovate is an initiative launched last August to help innovator companies navigate regulatory hurdles and bring new products and services to market.
One of the key challenges is that existing regulations often don’t cover emerging business models. Even when they do, startups often lack the resources to achieve full compliance. Hopefully, the FCA will be able to come up with a sandbox model that allows innovators to pilot new products, services and business models that they would otherwise struggle to bring to market.
Just as technology is transforming the way financial services are delivered to customers, it has the potential to transform the way regulation is delivered and reduce regulatory costs. By taking the lead in this area, the FCA and PRA can make the UK a more attractive regulatory regime and provide a fertile environment for UK companies to develop ‘RegTech’ products and expertise that can be exported overseas.
In Germany, the widespread adoption of the HBCI/FinTS banking API has helped foster a strong FinTech sector, spawning startups like Fidor Bank, Figo, Number26 and Avuba, as well as the Open Bank Project. If the UK banking sector can be persuaded to adopt a similar API, it can only be a positive development for UK FinTech.
The Bank of England has taken a keen interest in digital currencies and blockchain technology, and even raised the question of “Why might central banks issue digital currencies?” in a recent discussion paper. HM Treasury launched a call for information on digital currencies last November, and released a detailed response to the feedback alongside the Budget yesterday. The paragraphs below (with numbers in red) are taken from the latter document.
The government clearly perceives a significant opportunity in this space but the key challenge is to ensure consumer protection and prevent the use of digital currencies for criminal purposes (including money laundering and terrorist financing) without stifling innovation.
There’s little doubt that here in the UK, lack of regulation has hampered the digital currencies sector. Banks, having been hit with punitive fines in the past for failing to do enough to prevent money-laundering, refuse to touch anything Bitcoin-related with a 10-foot bargepole, meaning that UK companies in this space are typically forced to bank overseas (e.g. Bitstamp, Coinfloor and CEX.IO bank in Slovenia, Poland and Latvia, respectively, despite being based in the UK). Applying AML regulation to exchanges should remove this barrier to banking services and help make the UK a more attractive regulatory regime.
The next Parliament will begin in May so, with luck, we will see the result of this consultation by the end of the year.
The new Payment Systems Regulator may also have a role to play in ensuring that that digital currency businesses are not excluded from payments networks by UK banks.
BSI is the UK’s national standards body. As well as safety standards for things like crash helmets and seatbelts, it pioneered the quality assurance and information security standards which formed the basis of the ISO 9000 and ISO/IEC 27000 series, respectively.
The digital currency sector has seen its fair share of fraud, ponzi schemes and fiduciary failures, so it’s interesting to see the UK government opting against prescriptive regulation to protect consumers, in favour of giving the sector the opportunity to self-regulate. It’s very much a pro-innovation stance, and stands in marked contrast to the approach taken by the New York Department of Financial Services – it’s possible that the UK government, having seen the negative reaction to the New York Department of Financial Services first BitLicense draft, saw an opportunity to steal a march on New York (which vies with London for the title of the world’s leading financial capital).
It’s worth bearing in mind that “self-regulation” has a decidedly mixed track record in the UK, so there’s a question-mark over whether this approach will engender enough consumer confidence to support mainstream adoption. Also, the use of the phrase “at this stage” is significant.
The £10m in funding for research is a relatively small but significant indication that the government is willing to put its money where its mouth is. The Research Councils are the primary source of funding for research in the UK. The Alan Turing Institute is a newly-formed organisation intended to support research in Big Data and algorithms. Digital Catapult is an Innovate UK initiative intended to help commercialise data innovation.
Concentration of talent plays a key role in the formation of industry clusters. If the UK can attract talent to conduct research, and provide a fertile environment for commercialising the fruits of that research, it stands a very good chance of establishing a strong digital currency cluster.
FinTech is a significant contributor to the UK economy, and are are a key element of London’s role as a global financial centre. Yesterday’s announcements are a clear sign that the government is not just paying lip service when it says it wants the UK to be the best place in the world to do business in this sector.
The prospect of being formally regulated will likely prove highly attractive to companies focusing on Bitcoin and other digital currencies. It will confer legitimacy, and give both customers and investors greater confidence in the sector. Passporting will also give companies regulated in the UK the ability to offer their services across the rest of the EEA.
We’ve already seen companies like CoinJar move to the UK because of its Bitcoin-friendly tax regime. I wouldn’t be surprised if others follow in its footsteps.
I’m interested in hearing other’s thoughts on yesterday’s announcements. Please leave your feedback below as a comment or contact me directly.
Bitcoin Part 1 – The Flaws
When I return home from an overseas trip, I toss my left-over notes and coins into a drawer. Euros and US dollars obviously get used (as long as I remember to take them with me!) but the dirham, rubles, rupees, yuan, francs, and dollars from Hong Kong and New Zealand just sit there gathering dust – pieces of paper and metal that are effectively worthless here in London.
However, for all its faults, physical notes and coins remain the only way in which you can transfer currency in a decentralised fashion. Electronic money – the ones and zeroes in our bank accounts, the records of credit card transactions and inter-bank transfers – ultimately rely on central banks and mechanisms like CLS, which keep track of how much money each bank has.
Bitcoin is an effort to bring the advantages of physical currency – specifically the ability to transfer wealth with little-to-no cost and without needing to involve anyone else in the transaction – to the electronic medium.
(Many assume that Bitcoin transactions are anonymous. They’re not. All Bitcoin transactions are recorded publicly in the blockchain. At best, Bitcoin transactions are pseudonymous; at worst, network analysis – something that security and intelligence services are very good at – can provide major clues to participants’ identities.)
I first became aware of Bitcoin in 2010, when someone paid 10,000 bitcoins for a couple of pizzas. My instinctive gut reaction was that it was an interesting technology but, ultimately, would prove to be nothing more than a fad. Three years later, I have yet to be proven correct. Enough people have supported Bitcoin that an eco-system has built up around it. There are online exchanges where you can buy and sell bitcoins for dollars, euros or pounds; payment processors that allow merchants to accept bitcoins for goods or services; casinos where you can gamble your bitcoins; and online marketplaces where you can use bitcoins to buy drugs.
London’s Fin.Tech Opportunity
This article first appeared on the 3 Beards’ blog ahead of Digital Sizzle 8.
Finance and technology have been inextricably linked – and entrepreneurs have been exploiting that link – since the introduction of the telegraph in the 19th century. Until 1851, news was carried between England and the Continent by ships. That year, however, a telegraph cable was laid across the English channel. A German-born entrepreneur named Paul Reuter (who had previously used homing pigeons to bridge a hundred-mile gap in the telegraph links between Paris and Berlin) opened a “Submarine Telegraph” office in London and negotiated a deal with the London Stock Exchange to provide stock prices from European exchanges, in return for access to the London prices, which he then sold to stockbrokers in Paris. Over the next 150 years, London grew to become one of the world’s top financial centres and the company Reuter founded grew along with it. By the time it was acquired by Canada’s Thomson Group in 2008, the Reuters Group was worth $17.6bn.
For decades, the phrase “financial technology” referred to the institutional finance sector that deals with the capital markets – broker-dealing, sales and trading of shares, bonds and derivatives. Many large, established companies started out as fin.tech startups.
In 1981, Michael Bloomberg (now the mayor of New York) was made redundant from the investment bank Salomon Brothers. He used his severance package to found a company called Innovative Market Systems to provide market information to Treasury bond dealers. In 1986, it was renamed Bloomberg LLP and by 2008 it was worth over $20bn. Also in 1981, a company called Intercom Data Systems was founded in London. It later changed its name to Fidessa and by 2008, 70% of equity trades in London were being processed through trading systems built on Fidessa software. Today, Fidessa is listed on the London Stock Exchange, with a market capitalisation of over £700m.
By the late ’90s, investment banks were embracing Internet technologies and incubating startups. Tradeweb, an online platform for trading government bonds, was founded in 1996 by a group of dealer-brokers, led by Credit Suisse First Boston. It was acquired in 2004 by Thomson Financial (now Thomson Reuters) for $385m in cash, plus an earn-out of up to $150m. Three years later, a group of investment banks reinvested in a deal that valued the company at over $1bn. MarketAxess, a platform for trading corporate bonds, was incubated by JP Morgan and spun out as an independent company in 2000. It went public in 2004 and is worth $1.5bn today.
Both those companies are based in New York but over the past few years, London has emerged as a prime location for a new generation of financial technology startups like OpenGamma and Kurtosys.
Examining how Paypal makes money on cross-currency payments
Making cross-currency payments can be expensive. The mark-up (or, more accurately, the spread to inter-bank FX rates) applied to transactions that involve a currency conversion can be as high as 4%. In the past, it could be argued that the cost of processing international payments and the FX risk that banks assumed when providing the cross-currency component justified such high mark-ups. However, advances in technology now mean that the processing of such transactions can be almost entirely automated, which drastically reduces the cost per transaction, and the FX exposure can be tracked and managed in real-time, which reduces the risk. Furthermore, growth in transaction volumes means that economies of scale can be harnessed to further reduce the costs and risk.
However, mark-ups have remained stubbornly high. An example is the “Non-Sterling Transaction Fee” that most UK credit card issuers apply when a card is used to make a payment in a foreign currency (card issuers in other countries apply similar fees). This fee is typically in the 2.75-2.99% range and is supposed to cover the costs associated with the currency conversion. However, the fee charged to card issuers by Mastercard and Visa for processing such transactions is just 1%. I’ve never been able to find out the justification for that extra 1.75-1.99%. If anyone can enlighten me, let me know!
Those juicy fees present an opportunity for companies that process credit card payments to persuade customers to pay those fees to the credit card processor instead of their card issuers. Last August, I grabbed some screenshots to demonstrate how Paypal does this.
Leadership
The three most over-used, yet misunderstood, words in the business vocabulary are: innovation, disruption and leadership. It’s incredible how many people throw these terms around without being clear on what they actually mean.
Leadership, in particular, can play a massively important role in determining an enterprise’s success or failure, so it’s critical to understand it properly.
The most experienced and consistent practitioners of the art of leadership are the military, who operate in situations where lives (and victory) depend on the willingness of men to follow orders. As a result, business has much to learn from the armed forces, not least an accurate and concise definition of leadership.
Discussion of leadership is so often overloaded with vague but emotive ideas that one is hard put to it to nail the concept down. To cut through the panoply of such quasi-moral and unexceptionable associations as “patriotism”, “play up and play the game”, the ever-asking-your-men-do-something-you-wouldn’t-do-yourself” formula, “not giving in (or up)”, the “square-jaw-frank-eyes-steadfast-gaze” formula, and the “if… you’ll be a man” recipe, one comes to the simple truth that leadership is no more than exercising such an influence upon others that they tend to act in concert towards achieving a goal which they might not have achieved so readily had they been left to their own devices.
– Norman Dixon, On the Psychology of Military Incompetence (1975)
Or, to express it more simply:
Leadership is the phenomenon that occurs when the influence of A (the leader) causes B (the group) to perform C (goal-directed behavior) when B would not have performed C had it not been for the influence of A.
– William Darryl Henderson, Cohesion: The Human Element in Combat (1985)
What Steve Jobs really thought about stealing other people’s ideas
The BBC’s Newsnight dug up a great piece of footage from an interview with Steve Jobs from back in the ’90s, for a segment on tonight’s show about the impact of the Apple v Samsung judgment:
“I mean, Picasso had a saying. He said ‘Good artists copy. Great artists steal.’ And we have, y’know, always been shameless about stealing great ideas.”
Original footage, in context, below.
Back to the Future?
After the idea of the browser as a dumb terminal had occurred to me, but before I’d finished drafting this post, Mark Suster drew an identical comparison in a post on his blog, in which he presents a robust defence of the Mobile Web in the context of the Apps vs Web debate.
Until the ‘70s, the average computer was a huge, expensive mainframe locked away in an air-conditioned room. It’s users interacted with it through what we refer to nowadays as a dumb terminal – little more than a screen and keyboard on the end of a long cable. The advent of the personal computer in the late ‘70s changed all that by putting computing power on the user’s desktop. In the ‘80s local area networking technologies allowed PCs to share expensive resources like storage and printers, and allowed the people using those PCs to share information with their colleagues. No longer did you have to copy a spreadsheet onto a floppy disk and carry it across the office – you simply stored the file on a network drive. The Internet now allows us to do this on a global scale; we can now publish, access and share information quicker, easier and with more people than has ever been possible before.
But somewhere along the line, we seem to have regressed towards the days of the dumb terminal. Despite the fact that modern personal computing devices rival 80s-era supercomputers in terms of raw computing power, we seem to be progressing down a path where they are little more than displays for accessing information and services stored in “the Cloud”. The web browser is the modern equivalent of the dumb terminal and many mobile apps are simply custom-designed interfaces for an application running on a back-end server. Instead of connecting directly with our friends online, we congregate on sites like Facebook. Instead of collaborating directly with our colleagues, we do so through something like Sharepoint, Huddle or Basecamp.
Am I the only one who finds the concept of logging onto a website (that’s probably hosted on a server thousands of miles away) in order to collaborate or share with someone who’s sitting a few feet away, to be faintly ridiculous? We might be “connected” but not to each other.
Modern technology offers us incredible power and flexibility. It feels like we’re wasting the opportunity to use that technology to create tools and services of real, intrinsic value that are tailored to and fulfil users’ needs, instead of constraining them because it’s easier, from a technical perspective, to centralise data, or because the company’s business model relies on those constraints.
Wouldn’t it be sad if the reason we never got our personal jetpack was because it was more lucrative to keep selling tyres?
The picture above is of Ben Kingsley and Robert Redford sitting on a Cray Y-MP supercomputer in a scene from one of my favourite movies: ‘Sneakers’.
jackgavigan.com 