Readers here know that we have featured New Zealand based KlickEx on the blog several times in the past. KlickEx is on the front lines of innovative technology for cross border payments systems and for technologies that can be used by central banks.
KlickEx Founder Robert Bell is recognized globally as an expert in payments technology and for creative ideas on how to promote financial inclusion in places where it is needed the most (such as the islands of the South Pacific). Robert has also been a great mentor, willing to share his knowledge and experience on the issues we cover here over the past few years.
Robert kindly agreed to do a Q&A style interview for readers here discussing his thoughts on the current status of monetary system reform and its potential for the future. He works with central banks and banks around the world, specializing in real time cross border payments that help promote financial inclusion.
Last fall he announced a partnership with IBM and Stellar to implement what he described as the first institutional scale payments system to run on a blockchain platform (which we covered here). So he brings us an inside perspective on the latest information available regarding what is happening in Fintech and the potential for monetary system reform globally.
Robert Bell - KlickEx
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Q: After the 2008 financial crisis, many people felt that some kind of major reform to the existing US dollar based monetary system was close at hand. In fact, that was the very reason this blog was launched. Why do you think we have not seen any major reform to the global monetary system so far at this point in time?
A: Wow. This is a great question. I was one of the people who wanted to see the reform - very much - as I was inside banking at the time, and was more convinced than most, that banking as we knew it, wasn't as important as people inside the industry believed it was (as it stood then).
In my opinion, at that time, central banks were sitting on their hands, believing in a set of financial theories that were very incomplete, and as a result, what we saw was an utter embarrassment to the establishment. The bit I think was worst, was called the Capital Asset Pricing Model, and it had an extremely stupid assumption: That the market knows best. It allowed mathematical proofs to be built on this, and as we know, the market doesn't always know. It's the best we have, but it's almost never correct, otherwise it wouldn't change so much every day.
The danger of this is a complete lack of inherent responsibility to disclose what you know of what you sell. A lack of good faith. And CAPM eventually leads bankers to believe that something is of merit, if someone else will buy it, no matter how bad it is, no questions asked. And others buy things, because math tells them too. It's very dangerous. That led to what was primarily a greed and stupidity crisis. And it was potentially unbounded in scale. It wasn't really anything to do with the structural functioning of the system, but the human institutions that run it, in the back rooms, and the ethics involved on risk and honesty when things are bought and sold.
When it all fell down, the people managing billions and trillions of dollars of assets allocation based on assumptions that profit alone, and worse still, short term profit, was the sole important measure of virtue, were at fault. A new system of any sort, doesn't change this. A Blockchain doesn't either. People will still find their way in - or worse - sell rubbish claiming to be gold. And that's the problem with "the system": People's desire to short change others as quickly and as comprehensively as they can get away with. And that's nothing to do with computer science.
Q: KlickEx has been at the forefront of Fintech innovation in payments systems as proven by your recent partnership with IBM and Stellar. Do you think that cross border payments system technology will eventually be adapted for use by central banks in reforming the overall monetary system?
A: Yes and no. The systems will be put in place, but it's unlikely that central banks will run it. The issues central banks face here are primarily around jurisdiction; and how to manage conflicts of interest between factions of a super-national governance body is a large body of work that has to be established and maintained. It's what happened in Europe with the Sovereign Debt Crisis, and it's what happens when Bitcoin Exchanges fail. But countries cannot fail, we don't have that luxury in Developed Markets; else they'd be emerging markets...!
So the systems end up being owned by banks and then become narrowly focused on providing tools to the biggest banks (SWIFT, CLS), excluding smaller ones. The ones owned by government (FedACH, SEPA) are slow and inefficient and end up ineptly serving the lowest common denominator. The ones in the NGO (non governmental organization) sector lack drive and are often berated by Bank and Government competitors, to the point where good initiatives get lost (e. g. Gates Foundation's MojaLoop) in the same way Government ones do. Exceptions are Visa and Master Card, and China Union Pay, vs American Express.
To answer the second part of the question, the system isn't necessarily broken, it's just slow. The technology for real time payments has existed for a long time. The technology, like military technology, often takes a decade or more to test and prove and deploy - and can be 30 years old before it goes live, unless in wartime. Banking is similar - it's not about how fast you can go when the trajectory is upwards and exciting, but about how slowly you go downward when the trajectory is negative and terrifying. (note: I added the underline for emphasis)
Q: Do you see a future for private blockchain based cryptocurrencies to evolve into a viable and sustainable alternative to the current monetary system?
A: The key there is cryptocurrency. Blockchain is just another database system, that is almost free to adopt, but increasingly expensive to maintain. We know, a bank will spend a billion dollars on a system that promises to be nearly free in the long term. Blockchain is the opposite. Which makes it perfect for startups. It's brilliantly free to copy, clone or fork, but try and make it run at a billion transactions per second for under a cent per instance, and it is a monumental failure on a scale that the world has never seen (compared to the claims made). It's just lucky that cryptocurrencies have no scale, otherwise the colossal impossibility would be a realised failure.
The entire market cap of cryptocurrencies, is less than about an hour of what banks transact over morning coffee, day in and day out. Banks have capacity to process more than 10 Quadrillion transactions per year. Cryptocurrencies have so many flaws, that most people don't have the skills to acknowledge or even recognize that...
They just know it's cheap to start, and easy to raise money for it. That's not to say it's all doom and gloom, but just like any technology, and just like the Blockchain solution we've seen in the Pacific, it's not really what technology is used, but who is using it that is most important. As you've seen with IBM, Stellar, and KlickEx, knowledge over enthusiasm will steer the direction of change in the monetary system going forward, I believe.
Q: Five years from now, do you think the global monetary system will look very different from what it is now or pretty much the same?
A: Very similar. Just faster. There will be less change than moving from Windows95 to Windows2000 - or from Skype to WhatsApp, for the younger generation. Or perhaps a similar difference between the special effects in Hollywood movies between the movies Terminator and Terminator 2. What will noticeably vary is what can be done on top of the existing infrastructure.
Today's infrastructure is very efficient if you are a large bank. But those efficiencies don't filter down to people (end users). And people are getting a bit sick of being excluded from efficiency. This is our experience - and what we've been working on in the Pacific: taking the long-standing abilities of banks to price and trade foreign exchange, millions of times per second, at fractions of a percent per time, and sharing that with more people.
Q: What else would you like to say to our audience about the future of the global monetary system?
A: Have some faith. Be noisy with your frustrations. When we (KlickEx) started, banks would lobby with all their might, saying that nobody cared about real time payments - and that payments were risky (when the source of risk is actually the customer initiating the payments).
They battled with all their hearts - because of colossal benefits to banks of status quo - but eventually fell to inevitable modernisation with the pressures of competition. The system is better now, than it's ever been. And it's still better than any alternative. However, everything can improve. It it's not free and instant, it can be improved. So watch this space! (note: I added the underline for emphasis)
Thank you for your time and willingness to share your knowledge and real world experience. I am struck by your comments about how much the current banking system likes the status quo and how long it takes new technology to be tested and deployed. This is very much in line with what we have been reporting here on this blog. Things tend to move slowly unless some kind of crisis (like war in your analogy to military technology above) speeds things up.
Before we finish up, I noticed that recently you announced the news that the KlickEx Foundation will be active in a number of interesting projects to improve lives and living conditions in the South Pacific. Could you share a bit of that news with us and your level of excitement about taking on this project?
A: Thanks for asking! We have done a huge amount of good work already, seeking to advance the interests of our communities though monetary technology and instrument innovation. They may not seem like overlapping spheres of influence - but we have learned that they really are. We've channeled more than a billion dollars of direct private aid into almost 70% of the households in our markets in the Pacific - and have been cited by the UN for lifting household income by over 20% of GDP per capita.
We have a huge range of additional programs going too, from nutritional programs that have become the highest rated TV Series in our market, to our ocean filters that promise to remove the equivalent of millions of plastic bags worth of micro-waste per week. We have robotic farming and renewable energy programs, combined with micro-nutrient organic agriculture and Industrial scale environmental carbon reclamation harvesting. All of these projects are funded from monetary services that are saving families millions of dollars per week in one of the most underpopulated, but ecologically significant regions in the world. So yes, we're not only talking about the work were doing in banking, where there is much more to be done, but also in the physical environments where our stakeholders live. It's a big challenge - but scale isn't something we've shied away from yet.
