The Forex Rigging Scandal

There was only one big story that popped up on my screen today* and that was the regulators announcing that they were handing out fines of £2.6 billion to six banks for attempted manipulation of foreign exchange rates (FOREX).

The fines provide proof that the regulators found evidence to show that dealers from competing banks were sharing confidential information in order to coordinate their trades simply to boost their own profits.

As the prices of currencies change rapidly and continuously to reflect the rise and fall of demand, a system has been developed whereby the price of each currency is fixed according to the trades immediately before and after a set time every day.

That figure is critical as it’s then used to influence a whole range of other financial benchmarks. So what you actually have (or had – if you’re of the view that financial penalties actually prevent individuals simply seeking similar profitable opportunities in the future when they have power over huge sums of money within large opaque organisations) is an opportunity for unscrupulous traders to co-ordinate their activities via chat rooms in order to attempt to influence the price and to make money.

If you want more details, I suggest you check out Zero Hedge for some examples of how some serious money was made.

To put the fines into perspective, the FOREX market is one in which £3.3 trillion was traded every day in 2013 on average. Compare that to the size of the UK economic output in the same year (£1.6 trillion). London accounts for 41% of the global FOREX market according to statistics from the same year.

But is it now back to business as usual for the banks? What do you think – a few bad apples or wholescale cultural change? Interesting to note that the Bank of England was warned that there was currency market rigging in May 2008 and again in 2011 yet didn’t actually act until 2013.

Channel 4 Economics Editor Paul Mason has his own view on the matter:-

Surely the question here, however, is not whether more regulation will be successful in the future – but whether a model of centralised regulation which risks the capture of regulators is in fact more dangerous as it lulls us all into a false sense of security.

Nice work gents, indeed.

*That’s a lie of course. A far more uplifting, and positive story, is the fact that the European Space Agency successfully landed the Philae spacecraft on a comet. But, you know.**

**And, um, that’s not even mentioning the fact that Counterparty just managed to recreate Ethereum on Bitcoin. Wow.

 

Tipping Tuesday

I had a great day speaking about Bitcoin at the ‘Scotland and The Future Of The Web’ Conference today. It was a totally different type of audience for me,  filled as it was with folk predominantly from the public/third sectors.

It really is a privilege to be given these kind of opportunities to run through the general concepts at a very high level with that type of audience. If at least one person left that venue intrigued by Bitcoin’s potential and motivated to find out more then that’s a successful event to me. And given the fact that there were some great questions being posed at the end of the session (and no-one was asleep as far as I could tell), I reckon some folk are intrigued at the very least.

Of course, there’s usually a big difference between simply being interested and actually getting involved as we all know.  So it was heartening to see the bitcoin tips flying around Twitter this evening as part of ‘Tipping Tuesday’ .

If you aren’t aware of this yet, unless you manage to steer clear of all social networks, you might soon be. The short story is that following a post on Reddit last week encouraging the use of Changetip, people have been rushing to tip others. Whether it’s in return for useful content that’s been posted online, a thank you for help in the real world or just to support a cause, real value has been changing hands.

It’s attracted some press which was exactly the intention for some who are fighting to raise the profile of Bitcoin. It’s a no-brainer to expend that effort on particularly busy social channels where users may be skewed more strongly towards the early-adopter demographic. Regardless of the reasons, it seems like a great idea to me.

If you’re looking for someone to tip, I’d suggest taking a look at the RNLI, a charity in the UK that’s leading the way by accepting bitcoins as donations. Once you’ve got some bitcoins in your ChangeTip wallet, tweet the charity directly, include the amount you want to tip (you can do this in sterling if this is more comfortable than trying to decipher the many shorthand expressions) and make sure you use the @ChangeTip user handle in the message.

And it’s done – as simple as that.

UK Call for Information on Digital Currencies

Just a short post today as I’m preparing for a Bitcoin talk tomorrow at the Scotland and the Future of the Web conference.

A few days ago, HM Treasury put out a Call for Information on Digital Currencies. It’s interesting to note the reasons behind their request. It would be great to get as much input to them as possible on this if you’ve got an interest in crypto-currencies in general. The deadline for submissions is 3rd December. The UK Digital Currency Association are doing a great job of coordinating responses (if you haven’t joined already, you should – it’s free).

I thought that there would be some merit in just listing the questions here for those who can’t be bothered clicking through.

Question 1

What are the benefits of digital currencies? How significant are these benefits? How do these benefits fall to different groups e.g. consumers, businesses, government, the wider economy? How do these benefits vary according to different digital currencies?

Question 2

Should the government intervene to support the development and usage of digital currencies and related businesses and technologies in the UK, or maintain the status quo? If the government were to intervene, what action should it take?

Question 3

If the government were to regulate digital currencies, which types of digital currency should be covered? Should it create a bespoke regulatory regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are the possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)?

Question 4

Are there currently barriers to digital currency businesses setting up in the UK? If so, what are they?

Question 5

What are the potential benefits of this distributed ledger technology? How significant are these benefits?

Question 6

What risks do digital currencies pose to users? How significant are these risks? How do these risks vary according to different digital currencies?

Question 7

Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of taking no action? Would the market be able to address these risks itself?

Question 8

Should the government regulate digital currencies to protect users? If so, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? What other means could the government use to mitigate user detriment apart from regulation?

Question 9

What are the crime risks associated with digital currencies? How significant are these risks? How do these risks vary according to different digital currencies?

Question 10

Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of taking no action?

Question 11

If the government were to take action to address the risks of financial crime, should it introduce regulation, or use other powers? If the government were to introduce regulation, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? What has been the impact of FinCEN’s decision in the USA on digital currencies?

Question 12

What difficulties could occur with digital currencies and financial sanctions?

Question 13

What risks do digital currencies pose to monetary and financial stability? How significant are these risks?

There can’t be many within the UK Bitcoin community who don’t have a view on at least a couple of those questions. While people’s views might differ on specific points, it can only be a good sign that proper research is being carried out at a high level into the subject. Hopefully that will avoid some of the mistakes that have plagued other jurisdictions.

A Fear of Identity Theft

There have been a couple of interesting surveys released recently which seem to indicate that fear of personal data loss is really breaking through the public consciousness on a level never seen before. OK, they’re looking at US data but I don’t think it’s too unfair to extrapolate the results across the Atlantic as indicative of the mindset in other Western developed countries.

The first was a survey from Chapman University which showed the top five things that Americans fear the most are:-

  1. Walking alone at night
  2. Becoming the victim of identity theft
  3. Safety on the internet
  4. Being the victim of a mass/random shooting
  5. Public speaking

When asked what things worried them, the response of the US folk that were polled showed the following top areas of concern:

  1. Having identity stolen on the internet
  2. Corporate surveillance of internet activity
  3. Running out of money in the future
  4. Government surveillance of internet activity
  5. Becoming ill/sick

Similarly, another poll by Gallup reported the top two concerns were:-

  1. Having the credit card information you used at stores stolen by computer hackers
  2. Having your computer or smartphone hacked and the information stolen by unauthorised persons

It’s fascinating that issues of both identity and digital privacy really appear to be developing into part of the public’s consciousness. No doubt a significant part of this comes from the publicity around the rising frequency and severity of data breaches. But the reality is that we continue to use a system that’s entirely unfit for purpose when we transact with cards issued by an industry whose infrastructure often pre-dates the internet by many years.  And if your credit card details are one of the 56 million stolen after a visit to a certain home improvement chain, you start to see how damaging even one attack can be to the stereotypical man on the street.

Of course, transacting using a modern payment method that was actually designed for internet usage, relying on push (as opposed to pull) models for money transfer – such as, oh, I don’t know, Bitcoin for example – would solve that particular headache pretty swiftly.

The Future of Work

I’m a strong believer in the fact that what we see as ‘normal’ work patterns will evolve significantly over the next decade or so. Not only the tasks themselves but also the way in which we carry such work out cannot fail to be influenced by the advancement of technology.

Of course, that’s not to say that there will necessarily be widespread change overnight across all sectors. As William Gibson would say, “The future is already here – it’s just not evenly distributed”. It’s unsuprising therefore that many of the businesses that are adopting the most innovative practices are often found within the tech sector.

The adoption of Holacracy by Zappo and Medium amongst others (“no job titles, no managers, no hierarcy”) is fascinating and I think author Daniel Pink pretty much hit the nail on the head when he describes a new world where “talented people need organisations less than organisations need talented people”.

I came across an interesting tweet tonight which summed up a few thoughts about the future of work. The list was as follows:-

  • no resumes
  • no annual reviews
  • crowdsourced services
  • gamification
  • 100% mobile
  • salary transparency
  • telecommuters

I agree with all of these, with a caveat around the point on gamification. That term has so much baggage around it that I’m taking a guess that it’s meant to refer to some kind of reward mechanism within the workplace in return for productive service.

Change in working patterns is inevitable as connectivity, technology and the job-hopping inclinations of a new generation of digital natives holding differing values and expectations about their working lives come to the fore. But the real question as ever is what should you be doing in advance to prepare.


 

The Streaming Music Dilemma

Taylor Swift made headlines earlier this week when she made the decision to pull her back catalogue off Spotify. Her label had previously used the windowing model to protect revenues – basically holding back the release date of new material on streaming services until after the physical CD release.

That approach is well-known in the film industry where demand for new blockbusters will encourage people to pay premium prices to see the movies in the cinema before they finally arrive on Netflix some months later or wherever.

In this case, it appears that the label would have been happy if Spotify restricted new material to  those with a paid subscription. But that runs counter to Spotify’s business model in which non-subscribers have equal access to the (ad-supported) tracks across the service these days. So “Swift Hates Freeloaders” may actually have been a more accurate headline in this case.

It makes zero difference to me as a consumer but I think that she’s got it wrong.

I should set out my stall at this stage. I’ve had a paid subscription to Spotify (and before that, the legal reincarnation of Napster) for a number of years. Personally, I’m more than happy to pay for the service because it’s one that I brings me a huge amount of value. But it’s true that every consumer has to ask hard questions about whether supporting a distribution platform that is leaving its competitors behind is actually taking advantage of artists in some way.

My answer? No. As much as I agree with her argument that good art justifies payment, the industry model has changed – for good. The industry cannot continue to rail against the fact that scarcity is a fiction when it comes to recordings that are predominantly digital.

This isn’t to say that the current solution can’t be improved of course. But for those that find the current lie of the land unpalatable, I still don’t see a happy outcome on the horizon. Not in terms of income derived directly from recorded output. Indeed, looking at Mark Mulligan’s analysis, the existing subscription price for streaming music services will have to fall still further from the existing £9.99 monthly subscription charge to remain viable, thereby cutting further into musician’s revenue.

I’m convinced that over the medium term, we’ll move to a far more decentralised model that will, on balance, prove to be more equitable for artists who will distribute even more directly to their fans. But even if you’re judging art by financial rewards, the game remains the same. You need to build a fanbase. In the modern attention economy, the worst result of all is that you get ignored.

As Mark Mulligan wrote in another excellent post about the Tyranny of Choice, “Choice is fantastic but too much choice begets paralysis”. And Nilay Patel had an interesting analysis earlier in the year on Vox when he argued that

“Taylor Swift does not understand that the internet killed scarcity”

She, Thom Yorke and a number of other established artists are of course in a privileged position in many ways as outliers within the industry, with engaged and passionate followings. No-one likes to see a pricing abuse caused by monopoly. But the reality is that Spotify really isn’t the enemy here. If you want to listen to music for free, you simply go to YouTube. Research shows that that is where the younger listeners are spending most of their time in any event. Streaming services are still earning money for the acts.

As a consumer, I want choice. I may be in a minority but I’m happy to pay for it. Although there is a part of me that suspects that the publicity around this story during the same window as the release of a new album into a saturated market, couldn’t have damaged Ms Swift’s cause.

 

Startups, Maslow, Happiness, Unemployment

There was an interesting article in Techcrunch a couple of days ago reporting on a recent talk by philosopher Alain de Botton. In essence, he was criticising the current trend of businesses that are being formed to solve little more than lightweight “nonsense” issues, whilst the more fundamental pyschological needs of humans are being, for the most part, ignored by startup circles.

There’s no doubt that in the modern age, businesses are becoming increasingly adept at “marketing” – in the sense of becoming more skilled at using technology to get their message in front of as many eyeballs as possible. I often wonder whether that more aggressive method of personalised tracking by digital methods is adding true long-term value for the most part however. It’s one thing convincing someone that they need to buy a good or service, but if the product itself is not then truly valuable to the end user, is the business actually helping to grow the economy in any meaningful sense?

De Botton postulates that Facebook has been so overwhelmingly successful because it focused on a massively underserved area of online business, namely mankind’s fundamental need for better relationships. As he points out, that is not to say that they are doing this well. But even if they fail to deliver perfection on that front, they are selling us something that we are fundamentally seeking – not something that we merely desire.

In terms of the bigger picture, they’re not taking the easier route of simply focusing on clever ways to sell us things that we don’t need. That to me echoes the point that I’ve heard in a couple of talks by Sherry Coutu when she warned of the importance of making sure with a startup that you choose a big enough problem to solve.

He brings the argument back to Maslow’s famous hierarchy of needs and also points to the research a few years ago which showed (to simplify) that human happiness peaks once you start to earn around $36,000 – partly because your aspirations rise in line with higher GDP levels as you struggle to keep up with the Joneses.

Maslow's Hierarchy of Needs
Maslow’s Hierarchy of Needs

The point here is that the opportunity for new businesses to focus on the needs that live further up Maslow’s hierarchy of needs is huge – in part because very few companies are working in that sort of space (as yet). Instead, most are scrabbling around the far more competitive lower levels. Secondly, it makes sense because the goods or services that are produced with these goals in mind have a globally significant market size to target given the fact that they involve an fundamental essence of human character.

It’s an interesting lens to look at new businesses through now we’re at the stage whereby businesses of scale can be built with less money in ever-shorter timescales. If you’re interested, Steve Rosenbaum used the hierarchy of needs to compare  Silicon Valley with Silicon Alley in 2011 and Sameer Iyengar wrote an interesting article on how startups cater to our inner motivations.

So if you’re thinking of starting a company, de Botton advises that you look at what really makes people happy. Or, to put it another way, “every bit of human unhappiness is a business waiting to be born”. He also argues that unemployment is the consequence of “the wrong perception of what should be commercialised”. I’ve not thought of it in those terms before – but I suppose on a very basic level (ignoring such factors as inept execution of business model) has a very real strand of truth that lies within it.

 

Billion Dollar Unicorns Outside the Valley

Almost exactly a year ago, I remember reading Fred Wilson’s post in which he asked his influential readership to help crowd-source a study of billion dollar companies via Hackpad in response to an article in Techcrunch (“Welcome To The Unicorn Club: Learning From Billion-Dollar Startups”).

As is always the case with the internet, much of the hard work involved in that original project has now been used as the basis for a similar project further down the line. VC firm Atomico has now pulled together a fascinating study of billion dollar software companies that have been founded since 2003. Take a look at the website, the results have really been compiled in a really user-friendly way.

Whilst there’s always going to be debate over the definitions and exclusions from such a research project, it’s important not to lose sight of the fact that it’s always the big picture that matters with these things. The companies that reach that arbitrary billion-dollar valuation that acts as a proxy for phenomenal success (both in this study and further afield) are managing to do so in ever-shorter timescales with every year that passes – so, for example, it currently takes these outliers six years to get there from formation on average.

I was interested to see Sweden pop up in third position (after the US and China) as the country with most billion-dollar examples (three).

However, if there’s one key finding in the research for me, it’s the fact that 61% of the 138 companies that hit that billion-dollar mark were actually based outside Silicon Valley. This certainly gives credence to the argument that you can start and grow an incredible company anywhere. And for anyone based around the Scottish tech startup scene, that sounds like pretty good news.

When more money is a bad thing

Just as with yesterday’s post, sometimes it takes a visualisation to really ram home a point. Regardless of whether the boiling frog anecdote is true or not, I think most people would agree that the image below shows that we’re facing a pretty big issue within our current financial system.

How much money have banks created?
How much money have banks created?

Check out this quote from the Positive Money website:-

From the time when the Bank of England was formed in 1694, it took over 300 years for banks to create the first trillion pounds. It took them only 8 years to create the second trillion. Today cash – the green area at the bottom of the chart below – accounts for just 3% of the total money in the economy. The red area – money created by commercial banks – accounts for the other 97%.

This seems to me to be a particularly telling statistic because it helps to explain part of the attraction of crypto-currencies for so many.

During any ‘Bitcoin for Beginners’ talk, the speaker will usually explain how our money isn’t backed by gold any longer. At this stage, most people in the audience chuckle contentedly away to themselves, safely within their comfort zone. Then the explanation inevitably follows that in fact, as shown above, most money is actually created out of thin air by commercial banks who literally lend it into existence. At this point, in my experience, the atmosphere always subtly changes in the room.

For more information, take a look at the recent report from the Bank of England (‘Money Creation in the Modern Economy’).

Now it’s easy to see why many people are so attracted to the one of the principles that underpins Bitcoin – specifically that the rules about the supply of money should be agreed in advance. For many, a runaway train holds little appeal.

The Rising Tide of Data Breaches

There are many reasons why Bitcoin fascinates me.  Even if I was to ignore the fact that the block chain provides endless opportunities for innovators to reimagine existing models of business and governance across vast swathes of modern life whilst simultaneously unleashing a wave of brand new possibilities that just didn’t exist pre-2008, I can’t think of any other subject that has ever dragged me down such a deep rabbit-hole. No matter how much you know about the subject, you learn something new every single day.

So once you catch this particular bug, you can’t help but feel compelled to investigate a wide range of areas in greater detail, from computer science, cryptography, economics, governance to name only a few. And one of these areas is undoubtedly data security.

I’ve written before about the worrying lack of concern that society shows for the digital exhaust we’re collectively leaving in our wake as the information age accelerates. This goes much further than simply ensuring financial privacy for the sake of security of ownership – there’s little doubt in my mind for example that losing personal data that takes the form of health records is worse, I stumbled across another fantastic infographic from the always-reliable ‘Information Is Beautiful’ site run by David McCandless.

If you’re in any doubt that data breaches are becoming an increasingly serious problem in a world in which we increasingly live more of our lives online, take a look through the interactive visualisation of ‘The World’s Biggest Data Breaches’.

Sobering, isn’t it?