Digital Euro delivers privacy not dystopia; AML is BROKEN can AI fix it?; The new world order is multipolar.
"The dollar will be challenged by the renminbi and the euro for reserve currency status."
1. Digital Euro delivers on privacy!
2. AML is BROKEN can AI fix it?
3. The new world order is “multipolar.”
Today’s art: Friulan Dolomites Natural Park. The view from “Rifugio Pradut” near the town of Claut has a 5-star kitchen in the middle of the mountains. The Italian rifugio system makes the hiking worth the effort, with breathtaking food and views!
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1. Digital Euro delivers on privacy!
Digital Euro prototypes get us one step closer with PRIVACY and OFFLINE payments in the spotlight!
Download: here
The ECB results of its frontend prototyping exercise for the digital euro reveal much about our future digital euro.
The prototypes were a way of testing “frontend” client-facing interfaces but ironically, it was the backend “N€XT” system that revealed the most about the future digital euro, which will be: tokenized, use UTXO, and not be on the blockchain!
The ECB specifies that NO designs are final, but they do show how they're thinking!
🔹 ECB offline rollout centers on the hardware:
"Further challenges are expected to emerge with regard to the delivery of a production-grade solution that fulfills the Eurosystem’s requirements in the short to medium term (five to seven years), owing to (i) the novelty of the required solution; (ii) the low level of readiness of existing technology; (iii) the absence of security standards that encompass both hardware and software aspects of a possible solution; and (iv) the need to roll out offline support to a large variety of user devices and payment terminals."
🔹 UTXO for “Future-proofing:"
"The UTXO transaction format of the back-end prototype natively supports many types of transaction with a single, common message format and can easily be extended to support more transaction types. This makes it very beneficial for supporting both core and advanced features in a future-proof manner."
🔹 Conditional payments, not programmable money:
The reservation of funds transaction type is particularly interesting, as it allows conditional payments to be implemented without any reliance on smart contracts (user-defined programs stored and executed directly on the settlement layer), but rather based on APIs, with comparable functionalities and guarantees.
🔹 PRIVACY:
One of the advantages of a UTXO-based data model is in fact the ease of implementing a centralised ledger that does not allow balances to be associated with any given individual.
🔥The N€XT prototype natively supports one-time UTXO addresses and does not need to know which wallet holds the UTXOs, nor the identity or pseudonym of their owner, in order to process UTXO transactions. Thus, the prototype showed that the Eurosystem would be able to perform the settlement tasks without being able to know the balance or to infer the payment patterns of any user.🔥
Thoughts?
Takeaways:
—The digital euro will be tokenized with UTXO and NO blockchain.
—One-time-use UTXO wallet addresses are privacy-protecting and are not the dystopia promised by anti-CBDC advocates.
—Offline payments will be delayed due to difficulty in rolling out the hardware.
—🔥Tiered KYC!🔥 This means the value of the payment will decide the degree of KYC strength required.
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2. AML is BROKEN can AI fix it?
AML meets Machine Learning in a bid to fix a system that is so broken it defies belief.
Kudos to the BIS, who again takes the lead in modernizing our financial system by setting its sites on Anti-Money Laundering (AML) with Project Aurora.
Download: here
With Aurora, the BIS re-evaluates the “siloed” approach to AML systems currently used by banks. The problem is that money launders use networks that defy detection. It takes a network, not a siloed bank, to track a network.
The current state of AML is so bad it defies belief:
–Global money laundering is estimated to be between 2 and 5% of global GDP – $2 tn-$5 tn.
–Estimated total seizures are less than 1% – $20 bn-$50 bn.
–Compliance costs are approximately $274 bn globally.
Banks are spending $274bn to capture $20-$50bn!!! To make matters worse, they are left with fines and penalties when they are found to have assisted laundering!
To find a better way to deal with AML, the BIS tested machine learning models on a synthetic data set to avoid data privacy issues with real data.
Unsurprisingly, machine learning beat existing systems when deployed at the single financial institution, national, and cross-border levels.
Machine learning AML works:
🔹 Result 1: Machine learning models outperform rule-based monitoring, and models incorporating network features are optimal.
The rule-based monitoring approach detected only up to 25% of the money launderers in siloed monitoring, whereas the machine learning models detected 50%. The model can detect approximately 80% of ML activity with a cross-border view of transaction data.
🔹 Result 2: A holistic view and data monitoring enhance the detection of complex money laundering networks.
Machine learning models become more efficient when they are based on larger sets of transaction data, thereby providing a better view of transaction networks.
🔹 Result 3: Supervised learning models flag more suspicious activities and create fewer false positives.
Supervised models are trained on data containing labels indicating whether a transaction is illicit or legitimate.
🔹 Privacy or dystopia?
The key to these systems is using “Privacy Enhancing Technology” (PET) designed to protect sensitive information, even if data are distributed across multiple organizations.
Thoughts?
Takeaways:
—Global AML systems are so broken they defy logic
—Machine learning systems deployed nationally can and will do better.
—Privacy-enhancing technology is key to avoiding claims of dystopia.
—Look for these new systems to be deployed on CBDC networks!!
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3. The new world order is “multipolar.”
Adapting to the new world order and a “multipolar” monetary system.
Zoltan Pozsar, is a financial world rock star and was widely followed when at Credit Suisse before leaving the bank this past May with the UBS takeover.
Download: here
In this interview with the #InGoldWeTrust founder Ronald Peter Stoeferle, CMT, CFTe, MSTA Zoltan lays out the challenges faced by the dollar as a new multipolar currency order unfolds.
This is an important read, and with central banks increasing gold purchases by some 20% YoY at the dollar's expense, a timely reminder of a changing monetary order.
Why the change?
🔥"The money you have in the Western banking system is only yours if the political process that those banks ultimately report to or exist in allows you access to this money. When that trust is broken, you start building out your alternative payment and clearing systems."🔥
Highlights:
• We are moving into a multipolar reserve-currency world where the dollar will be challenged by the renminbi and the euro for reserve currency status.
• These currencies, especially the renminbi, would not necessarily be used as a reserve currency but rather to settle trade. Gold could play an increased role here.
• The fact that China is running current account surpluses does not exclude their currency from becoming a global reserve currency. In fact, the US ran surpluses post-WW2, and this led the dollar on its global reserve currency path.
• The Chinese are using swap lines to settle international trade accounts. This is a fundamentally different approach from the dollar reserve framework and would mean that trade can occur in renminbi without nations needing to hold vast reserves of the currency.
• The various crises that today’s financial market participants have witnessed were easily solved by throwing money at whatever problem arose. The current inflation problem is different.
• This situation is also vastly different from the late 1970s, when Paul Volcker curbed inflation by prolonged high interest rates. Chronic underinvestment in the resource sector and labor issues will cause inflation to remain sticky.
• The traditional 60/40 portfolio allocation will struggle in this environment. Zoltan recommends a 20/40/20/20 (cash, stocks, bonds, and commodities).
Thoughts?
Takeaways:
—Watch as a new multipolar currency regime evolves.
—This evolution will be slow, but cannot be stopped.
—Born of sanction fatigue and interest rate shocks, much of the global south wants a better deal than the USD offers.
—China’s RMB need not be a reserve currency but a means of settling trade.
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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