Singapore Management University Professor Li Guochun talks about how digital currency will change traditional payments

FST (Financial Services Technology Media) interviewed David Lee Kuo Chuen, Professor of Quantitative Finance (Applied) at Singapore Management University. Professor Lee Kuo Chuen talked with FST Media about how digital currencies will change the traditional payment field by 2020.

FST Media: How do you see the future of cryptocurrencies like Bitcoin in the next 5 years? How will they change the financial services sector?

plum:

“My research interests include understanding key issues facing ASEAN countries and beyond. I feel that Singapore’s integration into ASEAN has been a core policy for many years. An important development with the rise of cryptocurrency (Bitcoin) is that the Monetary Authority of Singapore (MAS) is very interested in this as a new technology application. There are many interesting areas for further research in this area, and there seems to be a consensus that new technologies such as Bitcoin can help financial institutions expand their business, especially by reducing their business expenses. As a result, they may be able to serve new customers who would not have been able to access financial services before.

“The point is that the focus is more on the technology than on the identity of cryptocurrencies as money. But I think Bitcoin and other cryptocurrencies will gain a much clearer understanding as money than they do now, because there are many possibilities for a country, an organization or a commercial entity to issue its own cryptocurrency. We are still in the early days of cryptocurrency development, and the technology itself has proven to be a groundbreaking and interesting creation.

FST Media: Is Bitcoin a threat to banks or an opportunity for innovation in financial services?

plum:

“Bitcoin is by far one of the biggest experiments we have seen in the financial world. We have had innovations like eCash, but the public rejected it. Many financial innovations have run into compliance issues and have been stopped. But Bitcoin is somewhat decentralized, so it is much more difficult for regulators to strictly regulate it. There is no legal entity behind Bitcoin, and the only way to intervene in Bitcoin is through financial intermediaries. At present, many countries in the world have already formulated relevant regulations and regulatory measures for financial intermediaries and technology sectors, and defined Bitcoin as a currency or a tradable asset.

“When it comes to banks, my observation is that banks have to follow a lot of commitment processes. When banks manage intermediaries, they have to ensure that the intermediaries have the same level of compliance with relevant requirements so that the banks can meet the requirements of the authorities. In some cases, the cost of doing so is much greater than the benefits. Therefore, it is not surprising that some banks are not enthusiastic about Bitcoin companies. However, things cannot be generalized. There are also some banks that are happy to cooperate with Bitcoin companies. The only issue is the standard required for intermediaries. I think this problem is not unsolvable. It is just a stage that any company must go through, especially when the company wants to become a financial intermediary. Bitcoin companies need more time to convince banks and financial institutions that you are running a genius business.

FST Media: What will be the next big innovation in contactless payments?

plum:

"The next big innovation will be around cybersecurity. I think Bitcoin brought us this groundbreaking concept of blockchain, which brought us decentralized bills. They have the potential to save a lot of operating expenses for financial services institutions and many other industries. Bitcoin's real contribution is related to its consensus bill, which I think will change the way we look at accounting, the way we store data, and the way we reach consensus on registration. If Bitcoin technology can successfully penetrate the market and the industry moves forward in consensus mechanisms, we will see that technology will not only reduce expenses, but also be useful in cybersecurity and can alleviate the problem of hacker attacks. From a cybersecurity perspective, consensus bills are a very interesting innovation, and many financial institutions and other industries will embrace consensus bills because of their cost-effectiveness.

“I don’t ignore the token characteristics of Bitcoin’s decentralized system. When the regulation is clear, Bitcoin currency will become a force that cannot be ignored. However, it is too early to regard Bitcoin as a world currency because things have not developed to that stage yet. But we should not ignore its token characteristics either.

FST Media: How will digital currencies change the payments space by 2020?

plum:

"The first thing you need to note is that cash is not economical and is inefficient. The vast majority of central banks will eventually reach a consensus that digital currency is the way forward (note: the digital currency here is not cryptocurrency, but the digitization of legal currency), for many reasons: taxation is clearer, you can better understand the flow of funds through data analysis, and you have real control over the money supply. I think digital currency can give us more information than cash, and these benefits will eventually be used by governments to make taxation more efficient. Digital currency can more effectively track where the money goes. There are good reasons for governments and banks to adopt digital currency. I think this is a natural development process - the only question is how long it will take to achieve it.

FST Media: In your Handbook on Digital Currencies, you discuss why “cryptocurrencies are thought to possess the characteristics of currencies that allow governments to exercise fiscal discipline.” What are the core challenges that governments face in regulating cryptocurrencies like Bitcoin?

plum:

“One of Satoshi’s ideas is that when money is growing at a constant rate, you become more principled. This is also true when you look at cryptocurrencies – like the debt problem. If money is growing at a constant rate, then it’s not so easy to modify and repay debts in the current debt system. As long as there is enough confidence in a currency, there are no constraints when a government decides to print money. I think there will eventually come a point when your debt is so large that a strong fiscal deficit will tell the world that you can’t repay your debts.

"In this case, confidence in the currency will be shaken, and this will be the main problem we face. However, this does not mean that the financial system will not "innovate". We can see the way China has internationalized the renminbi through bilateral agreements. The establishment of the Asian Investment Bank is also an interesting development. More debt is not used for consumption but for infrastructure. Now there is an international organization focused on domestic infrastructure. You will see the whole financial structure change over time. You can't help but feel uneasy about some questions: Will these countries with huge debts raise taxes on foreign investors? Will they be able to repay their huge debts? This will have an impact on the whole monetary system. The discipline of governments in how much money they print and how much they borrow is important because it affects interest rates and confidence in their currencies, and the impact can spread around the world.

“It’s interesting to see what cryptocurrencies can teach us about this, especially if we look at how debt has developed in recent years. My personal view is that cryptocurrencies have advantages over digital currencies because there is no central repository, they are more transparent, and they offer the opportunity to control the growth of your money, rather than being controlled by it. With cryptocurrencies, you may not be able to borrow as much as you want.

FST Media: In your manual, you also discuss how the authenticity of Bitcoin transactions can be proven using digital signatures and public key cryptography. How do you view cybercrime using Bitcoin transactions, and what are the core security issues to pay attention to?

plum:

"I think this question is just a feeling. People see Bitcoin being used for money laundering, drugs, online gambling and so on. Our research shows that there are a lot of people who are speculative about the future of Bitcoin. Many people do not think that Bitcoin will become a world currency because it is used for the wrong purposes and the public is cautious about it. In addition, the way Bitcoin is designed makes it difficult to regulate because there is no legal entity or anyone responsible for it. The only way to intervene in it is through intermediaries, such as Bitcoin-related companies distributed all over the world. Compared with cash, Bitcoin has greater transparency because Bitcoin leaves a record of transactions, while cash transactions do not leave any public records. There are technical means to trace where the money is and where it has gone, so it is unwise to use Bitcoin for cybercrime.

FST Media: What do you think of payment platforms like Google’s Android and Alibaba’s Alipay? What can the banking industry learn from them?

plum:

“I think the disruption in the banking industry is interesting, especially when we think about how banks can reduce costs and increase operational capacity when using new technologies like consensus ledgers. The main challenge facing the banking industry does not come from Bitcoin or cryptocurrencies, but from centralized non-financial institutions and e-commerce companies like Alibaba. It does not make sense to have an e-wallet and then expect the public to automatically use it. Instead, introducing specific business activities will help create customer loyalty.

“In the business of buying and selling goods, e-commerce companies like Alibaba retain customers by building trust between sellers and buyers through the use of Alipay. Then, for those who want to buy more goods to sell online, it becomes a lending platform, which attracts loyal users who use the platform. Although the app is free to use, you can increase your marginal revenue by providing fund management services, small guarantees, movie crowdfunding and many other similar business activities. It is these that distinguish Alibaba from a business organization based on an e-commerce platform. Alibaba has expanded its services to lending platforms, big data credit analysis and other platforms, and the data itself has been monetized. This is the biggest challenge for financial institutions: how do you retain your customers?

“The threats we see to banks right now come not only from e-commerce platforms like Alibaba and telecommunications platforms like M-Pesa, but also from many other platforms that create customer loyalty. Disruptive companies like Uber and Airbnb may pose challenges to financial institutions in the future.

“In this sense, the challenge is not just Bitcoin or cryptocurrencies, but also centralized businesses that are focused on creating customer loyalty. Further, I think cryptocurrencies will play a prominent role in financial services because you will always have to tokenize services, and once regulation allows, there will be strong loyalty to these tokens. Once companies like Alibaba have your data, they can record your behavior and come up with monetization solutions. As a result, the current incumbents will continue to be disrupted.

FST Media: What is the unattained “holy grail” in financial services?

plum:

"In terms of financial services, the next big thing is "connectivity inclusion". It is far more than just financial inclusion, it is connected through smartphones, clothes, and all signals. This is a fusion, including society, finance, and in short I call it "inclusion connectivity". Before, it was quite expensive for banks to provide services to people who were no longer covered by the system because of high credit and operating costs. Now, with the latest technology, this has become possible, and I think consensus ledgers are the lowest cost and safest solution to this problem. For inclusion connectivity, banks should also see that new technologies and cryptocurrencies can reduce their operating costs. "Inclusion" is the key word here. If you want the economy to continue to grow and business to continue to move forward, new technologies are opportunities to achieve sustainable growth. This is the "LASIC" model I proposed: lower barriers to entry, asset lines, sociality, innovation, and credit. All disruptive innovations will meet these LASIC principles.

“In the world, China is the most advanced country in digital banking and financial inclusion. We have seen some digital banks being established in Kenya, the United States and Europe, but the sustainable development of the digital banking model is in China because there is a social consensus behind it in China.

FST Media: Every leader has a legacy he wants to be remembered for, what is yours?

plum:

"I can't say I'm a leader. I study economics because I want to do research to advance people's well-being. Increasing knowledge is attractive to me, but that's not my goal. I've been in this industry for a long time. I've been in the financial industry and academia for nearly 30 years. I want to do some research that can affect people's well-being. I hope that what I do can point out the existing problems in the financial industry. Some of these problems are unreasonable to me. I want to go further and find win-win solutions for companies and regulators so that people can benefit from them. Ultimately, we have to be clear that no matter what research we are doing, we are doing it to increase the well-being of the majority of people in the world. We currently have a very unbalanced economic system. It is unreasonable that so many people are not included in the global financial, economic and social systems.

“I want to see how an ecosystem that solves the problem of ‘inclusive connectivity’ works, and I hope that all of us can create such an ecosystem to make the world a better place.