The Swiss National Bank and the Cypto Franc

Financial newspaper “Finanz and Witschaft” published an article titled “SNB will keinen Krypto-Franken”  reflecting on the speech “The financial markets in changing times – Changes today and tomorrow: the digital future” by Andréa M. Maechler, Member of the Governing Board of the Swiss National Bank (SNB) held at Money Market Event in Zurich on 05th of April 2018.

There are various views on the nature and definition of money, currency and cash which has substantially changed over time. The post How to explain ‘new’ things like bitcoin … provides some thoughts on this topic. It is very difficult to talk about all these terms as the definitions incorporate specific perspectives.

The challenge all countries, including Switzerland, face is to sustain global competitiveness. How does one move from the current economic system, of the industrial age, to one which is digital in its core. The post “Crypto Franc” – key ingredient for a Swiss national blockchain” provides a proposal published by the Fintech Rockers.

This essay proposes to create a Swiss national blockchain. A blockchain allows to track and change ownership of digital assets without the need of a central authority or intermediate. The exchange is peer to peer and cryptographically secured. Money is a key ingredient when values are exchanged and hence a blockchain infrastructure should contain some form of it to unleash the full potential.

“Such blockchain infrastructure, carried jointly by all Swiss cantons, will have an equivalent catalyst effect as the initial introduction of the railway system or the creation of the Gotthard tunnel during the age of industrialization. The Swiss national blockchain will enable local as well as foreign entities and all people with an interest and/or business relation with Switzerland to hold genuine Swiss cryptocurrency and/or execute transactions via legal compliant smart contracts.”

On this blockchain environment a cryptocurrency bound to the Swiss franc controlled by the SNB is envisioned:

“The introduction of Swiss cryptocurrency “Crypto Franc”, bound to the issued fiat Swiss Franc by the Swiss National Bank (SNB), revolutionizing digital payment capabilities. The national blockchain will enable and bring the Swiss industry(s) to the international forefront of the digital age.”

In her speech, Andréa M. Maechler commented on aspects of the proposal:

“A more prominent role for central banks in this end-customer business area is currently a subject of debate, amid calls for ‘digital central bank money for the general public’. The SNB opposes this idea. Digital central bank money for the general public is not necessary to ensure an efficient system for cashless payments. It would deliver few advantages, but would give rise to incalculable risks with regard to financial stability.”

“Which technologies and solutions ultimately prevail on this solid foundation should in principle be left to the market to decide, however. This division of roles between central banks and commercial banks epitomises our current two-tier financial system. It contributes to the stability of the system, while allowing sufficient leeway for innovation.”

Both are for sure valid points – but again perspective matters. If a “Crypto Franc” is seen as a modern form of cash then not a lot would really change. The SNB controls the amount of cash in circulation and it would continue to control the amount of cryptographic cash which could be safely kept and exchanged using a blockchain infrastructure.

Introducing cryptographic cash could have an impact on the financial system as it would allow people to keep their cash safe – within your e-wallet on a blockchain instead of your existing cash account in the bank. With a cash account the client gets a repayment promise by the bank in turn the bank can use the amount from this account for other business (e.g. mainly lending). The value of the repayment promise depends on the trust in the bank while the trust in the Crypto Franc depends on the trust into the currency.

Thus issuing cryptographic cash is not of the interest of the bank when ownership and value is no longer with  the bank but with the individuals. Regardless if a cryptographic currency is introduced, the prevalent systemic risk will continue as long as there is still book money or money created though credit. As the adoption of cryptographic currency increases, it will eventually reduce the systemic risks as commercial banks need to compete for such currency of clients. Clients will need to make an explicit decision when putting Crypto Francs onto an account which means transferring ownership to the bank against a repayment promise. They need to assess the risk(s) whether a bank is able to meet its repayment promise. On the other side the bank can provide return on investment where such transparency would rather de-risk the system invalidating some of the arguments stated by the SNB.

There is an increasing interest by companies and other organizations to create their own form of money. Dr. Edward De Bono suggested years back that companies should consider to issue their own currency using IBM as the example (Towards a digital barter economy?). It was futuristic at the time where he made  this proposal – but today in a digital world it becomes feasible (David Birch – Before Babylon, Beyond Bitcon – from Money that We understand to Money that understand Us ). There seems to be a trend going into this direction which could accelerate with potential huge implications on the existent monetary system.

“The SNB will keep a close watch on developments to ensure that it always remains able to assess their potential impact on the financial system in good time.”

This sounds given the context to passive. The SNB needs to active in the developments to gain the required experience. Observers will typically be late. Being late means becoming defensive and reactive. The SNB in my view should be active and engaged in building the best possible future for Switzerland and its financial system.

The ‘No’ by the SNB feels premature influenced by past paradigm rather than by the current developments and the needs of the future.  One aspect became prevalent from all the statements across the various parties engaged in the thought exchange is the complexity of the topic. It is a complex network problem and requires much more thoughts and discussions. It is key to have these exchanges in a frequent but immediate manner in order to come to conclusions before other organizations/entity(s) may take over and suddenly provide “the” new form of money pushing organizations like the SNB into a reactive rather than proactive  position.

Towards Canary Banking

Services offered by banks are mainly commodities sold with rather opaque pricing strategy. Client experience has become the main differentiator as underlying services are largely the same. The challenge has become creating outcomes which integrate into the life of the customer via respective touchpoints of the client’s eco system. This becomes difficult as the number of potential touchpoints increases significantly (ubiquitous computing).

The focus within banks has moved from operations and backend infrastructure to the touchpoints. Such focus leads to the shift in investments – which leave the backends under-invested hidden from the user by layers of newer systems.  This trend started years back when the financial services industry realized that the internet is not a transient effect and changed the way business is fundamentally done. The adoption accelerated with the rise of mobile and the next catalyst with the increase usage of conversational technologies like chat or voice.

Adding more layers does not improve the overall system – instead only to delay and cover up the increasing issues and complexities of the fragile legacy backend  which can no longer be sustainable (Measuring complexity in networks). From an opertional perspective the whole architecture becomes more and more unmanagable and risky highlighting the need for a substantial refactoring or more likely a total re-architecting.
Let’s for the moment assume that you own such a “backend” which becomes increasingly hard to change and difficult to operate. What could be a way out of this situation?

  • Be bold and start greenfield. This allows to get rid of the layers of legacy and build a system which matches current needs.
  • Try to be clever and refactor the system in an incremental approach. You have to be faster then the changes in the environment as you have to catch up and eliminate debts while adding the functions required to stay competitive. Implementation risk and sunk cost avoidance are the typical arguments backing this option.

Most organizations will go for the second option and try hard. They neither have strong leadership and capability(s) to aim for the first option nor the skills to actually build something new based on current state practices. The organization and the management are only trained to do small changes and the “internal immune system” reacts immediatly against any major change which could endanger the status quo.

Maybe it is better to start with a canary banking approach – where the next version of the bank is built up while the first is operational.

It is similar to driving a car – you choose one, drive it, maintain it and at some point you switch to another model. The new model may contain some parts already used before – that’s fine as long as they fit into the new model. The approach is rather different than continuously adding/ changing external cosmetics elements to an outdated Ford-T backend.

Measuring complexity in networks

People like simplicity. They prefer linear systems where an input translates in a well understandable way into an output or result.
The world is a mesh, a complex network of elements which influence each other. Small effects on one side may lead to a chain reaction in the network and cause a big change.
Many organizations have big difficulties to deal with the increasing complexity which is inherent to the shaping mesh economy. Established rules and patterns become less effective or even contra productive. It has become difficult to stay lean while things change fast – typically organizations and their supporting infrastructures grow continuously amalgamating approaches and technologies over many years.
The typical reaction is to launch some form of a simplification program. Such programs require good KPI’s to understand the benefits of the measures taken. But meaningful KPI’s are hard to find.
Organizations typically start counting elements as a measure and aim to reduce complexity by reducing the number of similar elements. Reducing e.g. the number of applications in use feels right – but it may come with side effects. This measure may decrease agility. Agility is required in order to deal with complexity. It may also lead to less productivity as broadly used applications may make it harder to deal with complicated situations where specialized tools provide a better support.
All problems are different and a best practice only fits to a specific set of problems. One approach which I find useful to measure complexity in the network is based on a heuristic which goes back to Robert Glass.
“For every 25 percent increase in problem complexity, there is a one 100 percent increase in solution complexity”
Let’s make a thought experiment. Let’s assume we want to measure complexity of a system with a set of functions which must interact with each other in a defined way.
  • One extreme is to have all functions in a single block – we have now a complicated block which hides all interdependencies between functions from the outside world.
  • The other extreme is to have a block for each function and then connect the blocks based on the functional dependencies. Now each block is simple but all interdependencies have been externalized which makes the network complicated.
This heuristic above means:
  • If we have 4 functions in a block and add another to it, then the solution complexity of this block doubles.
  • If we add an additional connection to 4 existing connections between blocks, the complexity of the network doubles.
The heuristic allows to find a setup where the functional bundling into nodes and network connections are in a good balance. Given this heuristic it becomes possible to start measuring and optimizing  the complexity of networks. Obviously not all functions are equal neither are all connections. Such factors can be included into a more detailed approach which allows measuring and optimizing an application landscape towards a low complexity.
The most decisive factor may finally however be the solution approach and the clarity of the design. If there is a simpler way to solve the problem then this is the first step to do. And this leads back to the starting point – in order to truly simplify first the problem space and the solution approach need to be challenged. They change continuously.

Information dissemination ethics

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Digital technology encourages the dissemination of knowledge and know-how. Its ability to influence socio-economic structures also means it confers power and a competitive edge on those who design its applications over those who merely use them. Ethics, a form of critical thinking on social structures and traditions shaping the lives of societies. Aim at questioning moral biases and opening new choices. Digital libraries belong to an emerging digital culture. New questions concerning production, collection, classification, and dissemination of knowledge arise. How is the integrity, validity, and sustainability of these digital collections guaranteed?
Information technology is now ubiquitous (Ubiquitous Computing) in the lives of people across the globe. These technologies take many forms such as personal computers, smart phones, the internet, web and mobile phone applications, digital assistants, and cloud computing. In fact the list is growing constantly and new forms of these technologies are working their way into every aspect of daily life.  Have we allowed the digital medium to grow chaotically and carelessly, lowering our guard against the deterioration and pollution of our infosphere.  Is it due to the desire and reflection of only what we wanted – entertainment, cheaper goods, free news and gossip – and not the deeper understanding, dialogue or education that would have served us better.
During prior mediums of disseminating information (e.g. newspaper, physical mediums) there was concerned with maintaining standards, adherence to accuracy and an informed public debate. We now have the same problem with online misinformation. These kinds of digital, ethical problems represent a defining challenge of the 21st century. They include breaches of privacy, of security and safety, of ownership and intellectual property rights, of trust, of fundamental human rights, as well as the possibility of exploitation, discrimination, inequality, manipulation, propaganda, populism, racism, violence and hate speech. A lack of proactive ethics foresight thwarts decision-making, undermines management practices and damages strategies for digital innovation. The near instantaneous spread of digital information means that some of the costs of misinformation may be hard to reverse, especially when confidence and trust are undermined (Emotional Trust in an Hyperconnected world). 
How do we  establishtrust through credibility, transparency and accountability – and a high degree of patience, coordination and determination. Will this be fulfilled with an ethical infosphere to save the world and ourselves from ourselves? 

“Crypto Franc” – key ingredient for a Swiss national blockchain

In various countries there are discussions about a crypto version of the national fiat currency, which in the case for Switzerland this could be the “Crypto Franc”. We joined the Fintech Rockers writing the exposé Swiss national blockchain and cryptocurrency.


The exposé proposes the “Crypto Franc” in the context of a national blockchain which would serve as the digital backbone in the shaping mesh economy. We expect with a stable currency available on the blockchain that it will provide a catalyst effect of the economy. Such stable currency could be the “Crypto Franc” issues by the SNB directly pegged to the Swiss Franc.

“Such blockchain infrastructure, carried jointly by all Swiss cantons, will have an equivalent catalyst effect as the initial introduction of the railway system or the creation of the Gotthard tunnel during the age of industrialization. The Swiss national blockchain will enable local as well as foreign entities and all people with an interest and/or business relation with Switzerland to hold genuine Swiss cryptocurrency and/or execute transactions via legal compliant smart contracts.”

For Switzerland (and other countries) it is imperative to think about its future in a digital mesh economy. Such an envisioned blockchain would be an excellent foundation. There are ongoing debates about such a strategy but prompt and immediate decision and actions on this topic are required in order to stay a leading country in the global financial system.

“The introduction of Swiss cryptocurrency “Crypto Franc”, bound to the issued fiat Swiss Franc by the Swiss National Bank (SNB), revolutionizing digital payment capabilities. The national blockchain will enable and bring the Swiss industry(s) to the international forefront of the digital age.”

The exposé was mentioned under the title “E-franc pipe dream fails to arouse Switzerland” on recently.

The PSD2 and GDPR gym

There is an intense ongoing debate about the pros and cons of PSD2 in media. On one side some feel that the financial sector is already heavily regulated and with any additional regulation,like PSD2, it will hinder the free evolution of markets. Others on the other hand think that PSD2 is good, as it allows fintechs and bigtech to access client account and transaction data as the catalyst ti add-on services and provide superior user experience. The client owns the decison power and the incumbents are mandated to collaborate. The incumbents may actually get the biggest value from PSD2. Sounds counterintuitive so lets explore a few thoughts.

There is a general set of ongoing trends – the age of industrialization has been superseeded by the age of information. Thus the pipeline businesses which domintated during industralization are being superseded by the platform business models. The platform models are superior as they take advantage of the benefits of network effects. They leverage ideally through similar advantages of the internet. Platform business models are typically composed of many smaller organizations grouped together via the platform into a structure  much more powerful than the sum of their parts. Successful platforms create a pull effect as each participant increases the value of the platform for all.

Banking is not yet a platform business – many talk about the uberization of banking and I am convinced it will happen. Typically a very small number of big players will dominate a specific sector in a platform economy  These are companies that successfully establish the pull effect described above. When banking moves into such a model, the only players are ones which can integrate seamlessly, offer highly competive services or the one which owns the platform and masters the integration and collaboration. All successfull entities must be well connected and are experts in the interaction and integration through API’s.

Todays incumbents today are often the opposite – they operate in a closed and private environment and try to create captive businesses individually. They interact with very selective partner(s) and does not empower their clients to make their own choices l. They also typically create specific standards and make it very difficult for others to interact with the large number of incumbents.

This is where PSD2 changes the game – it forces the incumbents to think about interfaces and forces them to open up. This is a threat as business(s) may be lost but it brings to the attention of incumbents wanting to change, a survival training in the world of VUCA (Dance on the VUCAno). This forces companies to participate in the mesh economy and its dynamics. It increases the chance to become robust enough to delay the time when the tech giants might take over (Next stop fintech giants). It may well be that a fair amount of revenues of incumbents get eroded during this process and that more client touch points are lost to competitors who just create better client outcomes and experience. But it also strengthens the companies in the upcoming big tech challenge.

This leads to a key question: Should other regulators follow the EU and mandate a regulation like PSD2 and GDPR in order to strengthen the financial system by exposing the incumbents to a shock to increase anti-fragility (In a world of VUCA seek anti fragility) or should it leave the choice to the incumbents which may prefer to protect what they once had and then experience at one point their Kodak moment with potential disastrous impact on the sector and economy?

Rightsizing organizational governance

Lars Vollmer made me think with his latest book about self organization. There is some sort of a chicken and egg problem – as soon as there is a rule or policy there needs to be some governance to verify its adherence.

“Governance is the way the rules, norms and actions are structured, sustained, regulated and held accountable.”

Many organizations have developed tons of rules and policies. I don’t think that this was planned upfront – it happened over time. Let’s rock an idea and think about what would happen if those rules and policies would be deleted? Would this lead to chaos?

This depends I guess on the organization. If the organization is driven by an external purpose and a mission, then the members of the organizations would continue to do the best to move the organization towards the vision. In a healthy organizations mistakes made by individuals would be corrected by the others on the base of common sense and shared principles. The organization learns by example how to act. It walks the talk.

In some organizations the members must sign that they have read and understood all rules and policies. In a healthy organization this is no issue – there are a few rules only and it is not a problem to keep them consistent and contradiction free. In large bureaucratic organizations such behavior can only have the purpose of ‘backside covering’. Somebody needs arguments he can use in case something goes wrong – look, it was clearly stated in the policy.

An organization which has many rules needs a lot of governance. Somebody needs to train the people on the rules, and track that all the rules have been followed. For the members of the organizations this reduces the amount of personal responsibility – it’s not intended to do what’s outside of policy even if it would make a lot of sense and it is fine to do things which don’t make sense as long as they comply to the rules.

Complexity is one of the key aspects in a world of VUCA (see Dance on the VUCAno) – it is not so difficult for a common sense based organization with a clear purpose and healthy structures to adapt to the increasingly fast changes. But it is impossible for a governance dominated organizations to do so for at least the following reasons.

  • Policies cannot be changed and adapted fast enough and keeping them free of conflict is impossible.
  • Members as a consequence have to react according to policy and will miss important developments and client needs.
  • The ones who define the policies will try to embed all eventualities to be on the safe side – the amount of rules grows.
  • Every mistake tends to result in new or changed rules.

It would be much better to have a small set of principles. Please note that a principle is not a rule – it is a meta rule which helps to identify the right decision. Many organizations have such principles in addition to the rules and policies. Just be careful to really stick to principles and avoid to state the obvious.

So what would be a good approach.

  • Clear vision and external purpose everybody in the organization shares (see Giving Direction)
  • A few guiding principles which help to channel the activities
  • The minimal set of rules and policies required to allow the organization to operate safely

Then let the people create the social structures and norms based on this.