Crypto-episode as a part of the Dutch financial history timeline

Apologies for the readers of this blog: it's been pretty silent for a while here, but that is due to a historic sequence of events that unfolded in the Netherlands with respect to the introduction of a crypto registration regime for providers of crypto wallet and crypto exchange services. It is a very interesting episode historically as it bears resemblence with a number of previous/similar episodes where the Dutch central bank hits the breaks and stifles innovation. 

What is happening is that the Dutch central bank (DNB) is pushing very strict rules onto newcomers in the payments/crypto market, without having a proper mandate to do so. There is an age-old example of halting the introduction of the credit-card, as well as a 20-years old episode with DNB stopping mobile innovators with e-money that I will not flesh out right now. 

I'll describe the most recent one first: it is about new payment institutions that in the Netherlands were forced into getting a licence instead of a registration as prescribed under the upgraded PSD2 (EU) directive. This is the backdrop against which it is easier to understand how the crypto-industry faced a similar treatment with one company succesfully pushing back (disclaimer: I am consulting that company on regulatory/compliance issues). 

PSD2-service: access to the account (8) requires a license in NL rather than registration

The brief version of the events that played out in the Netherlands for payment service institutions were the following. The European Commission added 2 new company activities to the list of activities that require further regulation. Service number 7 involved initiating payment transactions on behalf of the customer at another company: this required a full-on registration. Companies offering only access to the account of customers at other banks or payments companies were subject to a less elaborate registration regime, as outlined in article 33 of the PSD2.

However in the Netherlands, despite a policy existing to not do topping up of Brussels rules, the Ministry of Finance and DNB have a tendency to ignore that policy. So the companies that only required a registration for providing access to the account under the PSD2 were made subject to a licensing regime. The consequence was not just an increase in burdens but also unlogical duties being appliced to those players, for example the duty to do transaction monitoring themselves (while they did not initiate or execute any transaction). 

In an effort to be the first on the market many companies in the Netherlands tried to convince DNB that the license regime and subsequent market entry rules were illegitimate, but no one dared to take DNB to court. So as we say in the Netherlands, quite some companies had to swallow a melon and make serious extra costs. Still, the episode did quite some harm as to the legitimacy of the DNB supervisor as many lawyers agreed DNB was evidently overstepping its legal mandate. 

The PSD2 registration process for payment institutions in the Netherlands is therefore to be taken into account on the evaluation of what happend to the crypto-industry. As it may have signalled to DNB itself that it could easily ignore European rules with no one in the market complaining, it signalled to the legal/regulatory market that rationally it could not be assumed that DNB would by definition operate within its legal mandate. 

Crypto-services: require a registration in the EU but turned into de facto license regime in NL

By end of 2017 and mid 2018, the Dutch Ministry of Finance and DNB were in agreement that a fast transposition of the AMLD5-directive would be needed to bring crypto-companies under the remit of the appropriate supervisory regime. The EU directive and its previous impact assessment was very clear; a license regime would lead to too much credibility/legitimacy of the cryptocompanies, so only a registration regime was to be implemented, with possible license regimes following in a next stage of EU regulation (known as MICA-r). 

However, on advice otf DNB, the Dutch Ministry of Finance started transposing the directive and consulted a licensing regime with the market in December 2018. As the actual rules of the license still bore resemblance to the registration regime mentioned in the Directive, the industries comments focused on unworkable technicalities and explanations by the Ministry. The formal legal advice of the Council of State however, was quite explicit and it advised against the introduction of the law as long as a supervisory license mechanism and supervisory rules would be part of it. It stated that the transposition of this EU Directive is not the place for such rules.

In response the Dutch Ministry of Finance changed the law and made a new version. In this new version, the label of the license regime was changed to registration, but the essence became more of a supervisory regime. As a new set of rules the Ministry included further inspections and checks of business plan, organisation, risk management etc originating from the Act on Supervision of the Financial Sector. The actual legal construct includes a detailed evaluation of the company, a revocation of registration when a company is no longer compliant with the rules and a prohibition to operate on the market without a registration. This is a supervisory regime in disguise, which is beyond the necessities of the AMLD5 and goes against the advice of the Council of State.

For further details on the development of the law you can read this article, then see an update of January 2020 because something interesting happened. By mid-december the Dutch government website by accident displayed this letter of the central bank that fully confirmed its intentions to push for a license regime and license access conditions for crypto companies. FTM, the investigative journalists, published a full article on it by end 2019 that details the wording games used by regulator and supervisor to hide a license regime behide the wording: 'registration'. An English version of those events can be found in this article

The media attention raised quite some concerns in the Senate where the Ministry of Finance very explicitly and repeatedly explained: no no, it's not a license regime, but a registration regime. There is a huge difference between the two, a registration is being done while a license is being granted. So with this assurance the market hoped that supervisor DNB would change its course. The market assumed that the supervisor would take note of parliamentary discussions and guidance/explanation of the regulator.

DNB applied de facto license regime/application process leading to court case / market pushback

In practice De Nederlandsche Bank did not alter its previous course or any of its intentions and applied the full on registration procedure for payment institutions to crypto companies. It forgot about its obligation to register companies in 2 months, forced the application of risk frameworks that were used in the trust office market and came up with a self-invented interpretation of the Sanctions law that was beyond the rules. This latter requirement meant that crypto companies, in order to be registered, had to fullfill an ex-ante requirement of asking screenshots/video's of customers software wallets for each transaction to be made.

Grudgingly the market complied to the illegitimate requirement with one crypto company Bitonic, taking the measure to court. The interesing fact was that they filed a complaint against a positive decision of granting the registration with the request to the judge to kick out the illegitimate registration requirement on those screenshots.

Now to cut a long story short: the court case attracted an online viewing of many thousands and lead to the judge ordering DNB to redo its homework. Finding out that it was impossible to explain how a square could have the form of a circle, DNB had to withdraw its requirement but only did so for this single company (although half a year ago, the market is still waiting on clarification whether the requirement will also be lifted for them). 

What actually happened in the Netherlands is that DNB was already anticipating stringent FATF rules that suggest that product introduction or licensing moments are the moment in time to exert pressure onto crypto-companies to make them do what supervisors want. In this case, the FATF rules are not yet adopted in Europa, so the central bank figured it could use an age-old Sanctions law to the same effect. 

The market however had already witnessed DNB overstepping its boundaries, turning EU registrations into Dutch licenses with undue requirements so Bitonic as one of the players came prepared and called DNB's bluff. And next up will be a discussion on supervisory costs for crypto-companies where the whole market will do so again. 

Historic pattern

The historic pattern at play here is the interplay between regulators and market, fuelled by media incidents and publications. When in the 1970s credit cards appeared in the EU market and markets were mainly national, it only took national consensus between market players and central banks to keep one of the players (Visa) out of the market. 

Later on, when EU rules dictated that all cards had to be allowed an fair competition would need to be in place, the central bank mainly stuck to its legal remit. For some time in the 1990s the central bank also assisted in analysing the market and promoting innovation, opening up the closed EFTPOS structure in the Netherlands in the process. Still, when instructed by European powers that be it succumbed to the request to exempt European mobile operators from the application of e-money rules in 2002/2003, to the detriment of small innovators in the market. 

Other than that, the legality regimes were most prominent as the basis for DNBs action (or inaction). Suopervision was done so prudently that during crises the central bank didn't act convincingly and fast enough. Under media and political pressure, the course of the central bank became more politically inspired. It had to be seen as interventionist and proactive and whether or not this was fully based on legal rules was a consideration that moved to the background. 

Even the European Banking Authority noticed this and very politely didn't name the offendors FINMA and DNB by name, while this remark was directed at them:

164. The EBA has since observed that, in the absence of an EU‐wide approach, there are indications that Member States, in anticipation of a forthcoming FATF Mutual Evaluation or to attract VASP business, have adopted their own VASP AML/CFT and wider regulatory regimes. As these regimes are not consistent, this creates confusion for consumers and market participants, undermines the level playing field and may lead to regulatory arbitrage. This exposes the EU’s financial sector to ML/TF risk.

If history as any guide however, it may require more than one law suit to make DNB change course, so again it may become quiet on this blog while -as in the Muppet lab- the future of tomorrow is being made today.  


Cryptocurrencies and financial history: some reflections...

On January 30, 2018, I presented some reflections linking relevant events from financial history to the current cryptocurrency debate. Below, you can have a look at the 9 minmute footage from the crypto-day event here in the RAI.

During my 9 minute conversation with Vincent Everts, I aimed at sharing the following observations
- understand that the development of shares and securities regulation both have an evolutionary character,
- regulation of share issuances has for important parts also originated from self-regulatory structures,
- the tulipomania hype really fueled when forwards and futures become possible (a bit like the price hike in december 2017)
- when the mood is right, people will buy any shares, without due diligence on the nature of the security or cryptocurrency they will be biuying
- each burst in the bubble can lead to angry private investors, who will line up to smash or criticize the institutional context which 'allowed' them to get burnt,
- remember that the early forms of cryptocurrency date from the 1980s with a.o. Digicash taking the lead
- also in the regulated IPO world, accidents and fake news may distort the view for the public,
- don't underestimate the greed of the general public (who may be willing to take quite some extra risk to get an added revenue on their savings, when in a low interest rate environment),
- the issue of a 'fed-coin' is back on the table again, but now in an environment where we are used to having banks around (although those are a relative latecomer to the financial history party),
- regulators are now issuing warnings and some further consumer protection regulation in this area may be around the corner.


Why some countries started using cheques and others chose giro

These days I am busy writing a book on the history of Dutch retail payments. The focus of the book is on the dynamics of the Netherlands, without the aim to compare with other countries or to explain country differences. Still, the process leads to some observations that I would like to share as they may be useful for other researchers in the field.

What explains the origins of giro and cheque countries?
One of the basic facts in retail payments is that there is a structural difference between so-called giro-countries (Austria, Switzerland, Japan, Germany, Netherlands, Belgium etc) and cheque-countries (France, Germany, US, Canada, Australia).

In his excellent dissertation on payments and network effects, Gottfried Leibbrandt sets out to answer this question. After a thorough investigation of literature, he concludes that network effects are an important factor that helps explain the typical development path per country. At the same time, he finds it hard to trace the origin of the difference between cheque- and giro-countries
1. There is no satisfying explanation for the country differences. Empirical studies find that country idiosyncrasies rather than variables like GDP and crime explain the differences in instrument usage.

In a similar vein, the first BIS working group on Retail Payments observes:
Use of different retail payment instruments in the so-called cheque countries and giro countries can be explained by the differences in: 
• concentration of market supply among traditional providers of retail payment services; 
• financial incentives for providers with respect to debit and credit transfers; 
• nature of the risks in the value transfer processes for the two types of payments; and 
• legal framework and regulatory environment.
Of course the above list is long enough to be right and the report also mentions numerous French regulations that influenced its use, in particular also the rule that payment with cheques should be free to the people. And indeed this legal factor must not be forgotten.

Where is the cheque in the Netherlands?
In the Netherlands, a well functioning system of so-called cashiers notes existed, alongside regular cash for quite some time. Then in 1814, the establishment of the central bank and the introduction of bank notes introduced competition for the cashiers. In the early 1830s one of the cashiers fought a heavy legal battle to preserve the use of its cashiers notes, but eventually gave in to the reality that the bank notes were becoming the standard.

Ever since, the central bank was careful not to obstruct the cashiers and bankers too much in their business operations. So as a practical measure, the central bank took care to set its fees for deposits and securitized loans at a higher rate than the market. But fact of the matter remains that a possible candidate for a privately issued Dutch payment cheque, was no longer available.

Some parliamentary proceedings suggest that the legal rules with respect to bills of exchange 'wissels' were insufficient to really create a sound basis for the use of cheques as a payment instrument. As a result the market used bank notes in combination with clearing arrangements.

This intrigued me so when looking for more information on the topic I encountered a college book (by Mr. W. Molengraaf) that suddenly shed more light on the situation in other countries.

What Molengraaff states is that cheques came into existence in the United Kingdom as 'sight-bills' on a banker. They were brought into circulation as an alternative payment instrument to circumvent the stamp duty that would apply to a regular bill of exchange. He continues to state that also in France the cheques owe their existence solely to tax considerations.

Up next I figured I would take a look at a US stamp duty register. And we can indeed see the difference there. A bank check would cost 2 cents, regardless of the sum involved, while a bill of exchange would cost 5 cents and possibly more when higher amounts were involved.

To me it's clear that stamp duty may well be an important part of the puzzle, explaining the difference between giro and cheque-countries. But we should add an analysis of market structure, competing instruments to complete the picture.

The particular Dutch situation.... 
In the Dutch situation we will see that the discussion on setting up postal giro services started around 1902, already with references to the situation in other countries. It took us more than 10 years to decide on the establishment of the postal giro services and indeed market structure and some regulatory capture may have influenced the discussion. Also it became pretty clear that the incumbent bankers and cashiers did not want to move forward with their own version of bankers giro. But that's stuff for a next blog.

In the mean time, if you enjoyed this blog, you may want to let me know that you're interested to be informed when my book on hunderd years of Dutch giro payments will be published. This will help you understand more of the intertwined dynamics that are at work when retail pyament systems and instruments are developed.

Just send an e-mail here and I will notify you when the book is coming up.


'Duur uw uur' and 'Beidt uw tijd' : what do these words on the tower of the Beurs van Berlage mean?

Beidt uw tijd - Text on bell tower of Beurs van Berlage
One of the many questions we get asked about the history of the Beurs van Berlage, is the meaning and significance of the words underneath the clock of the bell tower.

Starting with a literal translation, the words come down to:
- Duur uw uur - As long it (your hour) takes
- Beidt uw tijd - Bide your time
and we can already guess that the words contain some sort of message to the spectator.

Yet, as this is the well-designed Berlage Exchange Building, there may be more to it, so let's explore this a bit further.

Integration of architecture and art
The architect Berlage designed the building in close cooperation with artist/poet Albert Verwey and the latter formulated a storyline that underlies the design and use of the building:
1- a historic overview of the development of trade in Amsterdam and the Netherlands,
2- a logical utopian perspective: money, trade and classes would in the future fully disappear.

These elements are aligned with:
1- the projected use of the building as a home to the commercial exchange, the stock exchange, the shipping exchange and the grain exchange,
2- the use as a public building in the far future (when the utopian society had arrived).

The poem: the Tower
Beidt uw tijd - Bide your time
For the bell-tower, Albert Verwey wrote a specific poem, which Nicolien Badura re-published on her blog:

De toren sprak naar de stad gewend:
Gij burgers, die daar jaagt en rent,
Sta stil als ik en beidt uw tijd,
Zij die geloven, haasten niet.
De goede en sterke daad geschiedt
Te rechter uur, den tijd ten spijt.

De toren spreekt tot iedere vreemd
Die naar de stad zijn richting neemt:
Sta vast als ik en duur uw uur.
Wie op zijn kracht niet vol berust,
Wiens ijver halfweegs wordt geblust,
Houdt hier geen stand, heeft hier geen duur.

The first part of this poem is about the part of the Tower that is looking towards the city, with the wording: bide your time. The second part is about the side of the tower that faces Amsterdam Central Station: the place where all visitors enter Amsterdam.

The poem- translated:
A free translation of the poem reads:

The tower speaks to those in town
Thou citizens, rushing and running around
Stand still, just like me and bide your time
Those who believe, do not rush
The good and strong feat happens
At its proper time, in spite of time

The tower speaks to each stranger
That heads towards the city
Stand firm, just like me and as long as it (your hour) takes.
Those who do not rely on their strenght
Whose zeal halfway is extinguished
Will not last, will not endure here.  

Taking the poem literally, we can see that the clock warns the cities inhabitants not to rush things but to rest assured that good things will come at their own time. So it's better to wait for the right time than to rush it. It could be viewed as a call to relax, to chill. Things will turn out fine in the end.

To the strangers, the clock says: if you wish to make it here in Amsterdam, make sure to rely on your talents and energy and persevere in your efforts. You won't make it here, unless you keep on pursuing your goals. 

Poetry in motion
The beauty of poetry is of course that all oother kinds of explanations of the poem might have been spinning around in the mind of its creator, Albert Verwey. We won't know and there's no need to. With poetry, as will all art, the creation can take up any meaning; so it's all up to us as readers.

Personally, I can also imagine the following additional layers of interpretation:
1 - hints at the design and building process itself. 
There was a very long time involved from architecture contest towards the opening of the building and the first part could be viewed as the building itself saying: At last, I'm here, I'm the good and strong feat that came into existence in its own time (not the projected/expected time). Similarly the second part of the poem would reflect the fact that the building/tower is well built, strong and will last a long time.
2- is directed towards the traders at the exchanges. 
The poem could be viewed as a call to traders not to rush into trades but to time their transactions properly (part 1) and persevere in their business (part 2).
3- reflects the utopian perspective, mentioned earlier.
In this vision, the first part of the poem would refer to the vision that over time the world will become a society without class distinctions and trade/money. At that point in time, the tower would still be there and the building could start its second life as a public / communal building.

So what do you think?
Feel free to share your insights with us via Twitter: @finerfgoed.


Minister of Finance Dijsselbloem ends reign of incrowd-supervisory-model for Authority Financial Markets

The last couple of weeks, the Dutch Financieele Dagblad reported on the fact that our Minister of Finance, Jeroen Dijsselbloem, had actively intervened in the workings, nominations and appointments of the Members of the Supervisory Board for the Authority Financial Markets. The dynamics of the case have a historic relevance that I would like to highlight in this post.

Incrowds at the Amsterdam exchange
The Amsterdam exchange, which has a long history going back to the early 17th century, has since its start been an open exchange. All who wished could enter the exchange and do business. But specialisation happened over time. Brokers existed, that were licensed intermediaries that could help out the incidental exchange visitor to find the proper counterparty.

As centuries went by, the specialist incrowd of traders on the exchange favoured an exchange were not just anyone could come and do business, but only licensed or vetted members. The city council of Amsterdam opposed this principle, but had to give in once the Berlage exchange building was in place. The building allowed for a physical separation and access control which provided the traders their own space, with their own rules. Papers report that even police men were pushed out of this space as the traders considered it their own land/country/turf/territory with its own rules.

The cherry on the cake, for traders, was -in 1914- the move to the Amsterdam Exchange building at Beursplein 5. They had their own rules, their own building and -of course- their own governance rules. A self appointed group of professionals was assigned to supervise trading and the trading rules. Eventually this was organised in the so-called Foundation Supervison Securities Trading (Stichting Toezicht Effectenverkeer). Of course, only in-crowders were appointed to be board members.

From self-assessment to a formal supervisor
As of March the 1st, 2002, the actual supervision of the stock exchange is in the hands of the Authority Financial Markets. This is an independent government body that has since grown into the so-called conducht-supervisor. It supervises conduct of players in the financial markets, and has expanded its reach to also supervise accountants, intermediairies, investment funds and so on.

The composition of its board of supervisors has varied over the years since 2002, but there was one remarkable choice in 2010. Minister Bos chose to appoint George Muller, formerly executive with the Amsterdam Exchange (which became Euronext) as the chair of the board. This was remarkable as the stature of Möller, in my view, was disputed. Möller had previously agreed on becoming the boss of Euronext at some stage and when he didn't land that job, he quit at Euronext to work for Robeco instead.

Although anyone is free of course to make such a career move, it does tell the observer that this person attaches quite some value to prestige and may be someone with a bigger need of attention. Also, one could argue that it is good to have a former insider in the Board of Supervisors of the Authority Financial Markets. On the other hand, it is once again a choice for the senior white male, rather than a competent female professional. It also doesn't take on board the fact that the role of the AFM grew bigger than a mere markets-supervisor.

An end to the era of old-school-male incrowders
Internal discussions within the Supervisory Board of the AFM gradually hit the news and revealed that the male Board Members were more flexible as to rules with respect to side-jobs and obligations than the female Board members. One of the female directors that missed out on a re-appointment had a regular exit-interview at the Ministry of Finance. This lead to further investigations into the workings of the board, side-jobs and so on.

The Minister of Finance decided to reshuffle the board of supervisors, some of them left and the Ministry motivated the board to appoint Merel van Vroonhoven as the new director of the Authority itself. This is quite an intervention indeed. When seen from a historical perspective however it is a measure that was long overdue. It is an appropriate end of the era of old-white-male stock exchange traders-incrowd that make up and play by their own rules, regardless of the interests of society.


Reflection on almost 100 years of retail payments in the Netherlands

Today marks the end of a period of almost hundred years of consumer payments in the Netherlands. Here is a brief reflection on this period. My hope is that we retain our innovative mindset and that we abandon old school practices like: competition on technology and inward-thinking-based marketing practices.

The beginnings
It all started out with a certain demand of the public and small retailers, around 1900. It took however more than ten years before the city giro of Amsterdam (1916) and the national giro of the Netherlands (1918) were set up. In the period leading up to this moment, the cashiers were asked whether they wished to improve their services, as this might lead to the parliament to conclude that no national giro was necessary. Their response was too meagre as a result of which they created their biggest rival: the national giro system, operated by government.

This system effectively created a benchmark for the private industry by offering (some time after it's start) payment services for free to the public. Today we would call this the Internet model, but in those days, this lead to repeated discussions on the undue competition element. Bankers and cashiers assumed that the national giro was cross-subsidized by government; while effectively the reverse became true. The national giro acted as a cash cow that covered some of the other costs for the Ministry of Transport (including the costs of post offices etc).

The city giro Amsterdam has stood out mostly for its innovations: the use of modern bookkeeping machines, the introduction of photo-imaging (in the 1930s) to process payments easier as well as the early introduction of a payment card to the public. The national giro, in turn, was early to create a mechanism of inpayments that could be used by government services, that used similar (punch card) standards.

In this respect it should be noted that the national giro, during the previous century, was plagued by several operational distortions, leading to 'giro stops'. One big one occurred in the 1920s and shut the system down for almost a year, other ones happened after the second world war. These stops instilled a big trauma into the organisation with the effect that when in 1965 a change was made to using punch cards and mainframes, this was done with meticulous scientific precision in order not to fail. Ever since, the postal giro (later Postbank) would be very keen and strong in the area of operational logistics and control.

Competition on standards and technology
For the most part of the evolution of Dutch payments, there were differences in technology used. A first attempt to bridge these differences occurred after the second world war when a commission on the integration of giro traffic tried to bridge the bankers vs giro gap. This didn't work out.

In the mid 1960s the bankers were keen to find funding in the retail market and realised they needed a better clearing system to process faster payments. While they were in the process of deliberating this move, the postal giro offered them to join/use the same standards as they were, in order to achieve uniform processing. For strategic reasons, the banks decided not to do this and chose a slightly modified technology and numbering system of their own. Remember: this was of course the age of shielding off markets by technology.

The net effect for the consumers and companies was less positive however. In the end it took some 30 years to create bridging standards/protocols to integrate the different payment standards of bank and giro. And even when the digital, networking time started (in the 1980s) banks and giro found it hard to abandon the classic competition by technology paradigm. For the EFTPOS network they did use a common standard and this also seemed to work for the Chipknip e-money products. Yet, due to misunderstandings and distrust at the board room level, the Postbank decided to jump the Chipknip ship to start the separate Chipper product. Again, the effect was that consumers and retailers were burdened with dual standards in a market that is too small to do so.

Inward based marketing of the big banks
With the deregulation of financial markets and the privatisation of the Postbank, all providers of payments were commercial companies. The Dutch banks grew bigger and with that their bureaucracies. Postbank gradually lost its touch-and-feel as a former public entity and became a bank like all others. The best event that symbolises this is the abolition of the Postbank brand by ING.

The net effect of becoming bigger and more ambitious is that straightforward customer research and marketing gets stampified. This is a word that I coined to denote the fact that in those big banking bureaucracies the responsibilities of employees - with the only exception of the board - becomes limited to the size of a postal stamp. The result is that these companies (marketing) departments require more time for internal debate, offcie politics and consensus-finding which they can't spend at finding out how to best serve the customer.

The consequence of this stampification is that the banks lose touch with their customers and reality. Our last retail payment product, the Chipknip, showed this most clearly. The ridiculous local battle between two competing e-money schemes (although perfect from a competition perspective) created so much nuisance for retailers that this inspired them to get back at the banks. Infuriated by high terminal switching costs, they found the newly set up competition authority at their side to fight the banks cartel behaviour.

As such our retailers were quite successful: the banks were being fined and a part of the fine was channeled towards them (via a Covenant) to improve the EFTPOS situation in the Netherlands. This Covenant was even prolonged to ensure a continued collective rebate for retailers on EFTPOS fees. Effectively we could thus see the retailers as being the clear winners in the last 15 years of retail payments here in the Netherlands. [And as with today's MIF-debate we can wonder whether the benefits they derived from emptying the pockets of banks did really end up in the consumer pockets by lower prices.]

Back to inward-based-marketing: the best (and typical) example is the way the Chipknip product was initially taken off the market. Banks informed the customers that they all had to unload their Chipknips at specific loading/unloading points. This lead to a big confusion and questions on twitter. Eventually some individual banks decided to give the money back on the basis of the internal administration so that customers didn't need to bother going to an obscure loading point. And then, quickly, all banks decided to do this.

I sincerely hope that we will no longer witness these old school thinking marketing methods in the new year. Banks need to find a way to innovate and listen to clients and society or they will be trapped in old behaviour that is only comprehensible from a stampification point of view but not understandable for customers outside the bank.

If history is anything to go by, we may well see a repetition of the SEPA-dynamics in the banking domain. What I mean with that is the following: as banks are busy lining up their internal systems in order to conform with a whole range of upcoming new EU regulation (keywords: PSD2, MIF, AML), the non-banks will be able to build all kinds of new products at the fringes of the payments market.

Most of these new products won't be made from a payments perspective but will solve a user problem. Creating a payment button in these products doesn't require much more than a direct customer relation and a European direct debit agreement. So we might well see the banks moving into a back-seat role of providers of the payment rails for non-bank providers of user services.


Late july in 1914 and 2014: two significant moments in time

A hundred years ago, the first World War was gradually developing. The political and military turmoil affected the stock exchanges all over the world and the Dutch stock exchange closed. In the Netherlands a run occured for physical silver and the government decided to issue the so-called 'Zilverbon', which was a future claim to physical silver as it would become available. Almost overnight, the payments infrastructure was changed; an infrastructure that was mostly based on the use of cash rather than bank accounts and payment instruments.

Fast forward to today: after a long period of careful planning, we are again at the verge of changing our payment infrastructure by moving to European standards in the retail payments domain. Both political and economic drivers have caused a massive technical change, which to the consumer is mostly visible via the ultralong new bank account number IBAN that has to be used as of tomorrow.

What changed in the mean time?
In between these two historic moments we witnessed:
- the gradual development of city giros, nationwide giro and bankgiro systems, account systems and the development and issuance of domestic payment instruments (acceptgiro, standing order, direct debit, guarantueed cheque, card and app payments),
- a continued learning process with respect to counterparty risk (on the exchange or with respect to banks and countries) and the development of a lot of regulation to mitigate this,
- two world wars, followed by the further economic integration of European countries into the European Union; a body that shows Member States that are still struggling with their position with respect to military action in the Eastern parts of Europe, bordering Russia,
- an improvement in living conditions, welfare and wealth.

What really changed?
It is not easy to distinguish the underlying changes in our society. Technological change may often appear to be progress while it simply reflects and allows the human faults to be reproduced on a more advanced level.

Still, I would hope the most significant change over the last century to be that we have created a number of institutions (UN, GATT, BIS, World Bank, IMF) that allow countries to not fight their battles on the ground but in economic terms. There are of course deficiencies within these institutions, but I would hope that we will move forward in using these structures to limit the amount of military conflicts as much as possible.


The Dutch experience with standing committees in the retail payments domain

On Friday, the 16th of May, the Euro Retail Payments Board (ERPB) held its first meeting in Frankfurt. The start of this new institutional body may raise questions in the industry as to its exact objectives and what it will achieve in practice. However, Dutch history shows that there are clear benefits to having long-term standing committees in the retail payments sector.

Standing committees in payments: the Dutch case
Originally, the Dutch market for retail payments consisted of privately owned commercial banks, savings banks and cooperative banks that competed with the government-operated Postal Cheque and Giro Services. The system design of these providers differed. The private players had set up the so-called Bankgiro system as opposed to the Postal Giro system of the State.

In the 1980s, the technology difference served as a barrier between the institutions, which remained in place until the State privatized its Giro-services in 1986. Subsequently the work started on the harmonization of technical standards by means of the work on the Dutch Payments Circuit (Nationaal Betalings Circuit). It took until 1998 for all the different types of payment mechanisms to be fully harmonized.

Although it did take quite some time to harmonize the technical standards in the Netherlands, the regular interaction between industry players improved the trust and willingness to cooperate on issues of common concerns. So when the need arose, in the 1990s, to drive down the costs of retail payments a dedicated task force was set up. The task force developed an array of measures and communication to steer the users to the most efficient payment mechanisms. The effects in changing the payment mix in the Netherlands were clearly visible.

National Forum on the Payment System
At the end of its term, in 1995, the task force was converted into a standing committee on the efficiency of payments in which both the demand and supply side were represented.[1] This standing committee was the precursor to the National Forum on the Payment System that was set up in 2002. This National Forum functions as the platform in which issues with respect to retail payments are discussed between representatives of suppliers and users of retail payments.

Over time, the Forum has established working groups on the migration to EMV, on the migration to SEPA, on usability, security and efficiency. It has become the platform for discussion of market developments and collective decision making to improve payments in the Netherlands. For example, when the 1 and 2 eurocent coins in practice created too much confusion for consumers and unnecessary costs for merchants, the members in the forum agreed to abolish the use of these cents and to implement a rounding procedure. This improved the efficiency of Dutch retail payments by approximately € 30 million per year.

Unlocked potential in forming bonds and creating trust
In the Dutch situation there have been many participants to these standing committees and working groups that at the time felt that a lot of their work amounted to pushing back and forth paperwork rather than contribute to real life problems. And to be honest: at some stages of the process or in some working groups this may have been the case. 

I have spoken to quite a number of participants to such committees and working groups. In hindsight most of them acknowledge the value of the trust and bonds that are being built by working together with opponents and competitors on issues of interest. These bonds and relations spilled over into an increased trust and cooperation outside the formal scope of the committees an working groups. Both board members and technical experts create a wider and trusted network of counterparts that were consulted when the need arose. 

We should therefore recognize that apart from the actual output, the ERPB work in itself will also create trust an bonds in the European retail payments industry. This will unlock further potential and further cooperation that will be beneficial to all in the retail payments sector. It is this 'hidden value' that must not be underestimated.

[1] The so-called Working Group on Efficiency in Payments: ‘Werkgroep Efficiency Betalingsverkeer, which was chaired by Mr. Klomp, a highly respected representative of Dutch retailers.


Frijda's theory of money (1914): still relevant for bitcoiners today

This week, Mount Gox, a very large provider of bitcoin services, couldn't live up any more to its services agreements with bitcoin users. It provided exchange and storage services for bitcoins, but due to a technical implementation flaw, the bitcoin holdings of users were compromised. Essentially it wasn't clear who really owned the bitcoins. The website went black and users can no longer claim their bitcoins.

Tumbling off the learning curve
I view the failure of Mt Gox as a logical consequence of the learning curve that bitcoin holders and bitcoin companies face. The bitcoin, although considered decentralized, is just as centralised a system as any other value transfer mechanism. However, for ideological reasons, the developers chose to only describe the technical heart of the system (the algorithm) leaving the rest up to the market.

This open source code approach has some advantages, among which a very speedy development of applications. Yet, we are for some time now witnessing what it means if systems lacks a central authority or scheme manager. There is no entity taking responsibility for the proper application of this scheme so no one is chasing users or companies because they don't abide by:
- usage conditions (demanding user identification),
- security requirements and certification of tools,
- specific legal frameworks.

As a result we have seen a whole community of interested companies and users climbing up the payments, banking, investments and monetary learning curve. The inevitable consequence is that those who do not get it right, will pay a price, while the others continue to learn. Due to the digital nature of bitcoin, these developments unfold rapidly, allowing us a compressed overview of interactions and developments from financial history.

Frijda's theory of money (1914)
The essential lesson at stake is that the usage of any value transfer mechanism does not just rest on its acceptance by users, but just as well on the rules and regulations that underly the value transfer. In 1914, the Dutch lawyer Frijda analysed this topic in his dissertation on the theory of money. At that time discussions emerged on the nature of banknotes. Did they have value because they were exchangeable for bullion, because they were defined as legal tender or because the public used and accepted it?

Frijda pointed out that the underlying legal framework that safeguards property in a society constitute a necessary precondition for the use of payment instruments. Without such safeguards, people will tend to stick to other stores of value rather than attaching value to local bank notes. Until today this effect is clearly visible: consumers tend to hold and use foreign cash or commodities if they live in country with a lot of curruption, a weak system of justice and an instable monetary climate.

Trust is built by institutions and markets
What makes money tick is a solid institutional basis, upon which trust can be further developed. The latter part can be done by a combination of regulation (supervision) and self-regulation (market action). Which brings us back to the Mt Gox cas.

Following the events of this money, a statement was released by the bitcoin companies Coinbase, Kraken, BitStamp, Circle, and BTC China. The industry leaders committ to safeguarding the assets of customers, to applying strong security measures, to using independent auditors to ensure integrity of their systems and to have adequate balance sheets and reserves to be able to ensure continuity.

In sum we can now see both a gradual development of both the institutional framework for virtual currencies and the market-driven self-regulation. This reflect the fact that - whether you like it or not - trust for financial services is always built on institutions, regulations and self-regulation.


All 2013 activities for Financial History of Amsterdam

Launch of digital museum 'Financieel Erfgoed op de Kaart'
Financieel Erfgoed op de Kaart2013 started out with the launch of our digital museum on Financial History. It is called Financieel Erfgoed op de Kaart and is a website that contains the stories and lokation where financial history happened. The site can be viewed on the desktop, in which case it looks like a rich google-map, or via the mobile. The mobile is sensitive to the location and will show the nearest hot spots of history as well as a responsive mobile menu. The launch was covered in both national and regional media and has a steady flow of visitors ever since.
Boat- and walking tours
We organised several taylor-made walking tours on the financial history of Amsterdam for visiting US Students, Norwegian insurers, financial supervisors, Nyenrode college students, employees of Booking.com and the Dutch Ministry of Economic Affairs. On top of that we introduced a boattour on the financial history of Amsterdam, for two large organisation in the financial sector. 
April: Filosofy night on guilt and debt
In april of 2013, the Filosofy night was dedictaed to the theme of guilt and debt. We presented an overview of history and future of money with the title: “Back to the future”. In addition we joined a radio show conversation with Werner Trio of Radio Klara on the topic of money and value.
The Filosofy Night occured in the former Exchange building: 'de Beurs van Berlage'. This inspired us to dedicate a separate part of our virtual museum on the financial history to this site. Since then, all visitors of the Exchange building can use their mobile phone to have a look at the financial history of that building
We wrote some guest blogs. One was about Leviathan for Felix Meritis, the other was a blog on the hands, swearing an oath, at the Amsterdam Museum site. Apart from that we regularly published in the online-blog of the Dutch Financial Newspaper: het Financieele Dagblad. We presented an unknown story of Amsterdam's city giro for a festive event in June and held a workshop on the future (and past) of money for a large financial institution.
Radioshow: Casa Luna
To end the year, we were asked to join the Dutch radio show Casa Luna to talk about the history of money, alternative payments and the current situation in the banking sector. This was a very inspiring two hours of discussion, with a nice deviation to the role of artists and their capability to point out the faults in the financial system, way before supervisors acted. 

2014: pubquiz and walking tour apps
In 2014 we will continue sharing our passion for financial history with all visitors to Amsterdam. We will develop a pub quiz on financial history and launch an iTours app on the financial history of Amsterdam. It will show pictures from the city archive and allow you to experience the history in your own pace. 

We look forward to seeing you in the new year !


Tapering delayed: another historic moment for the FED?

Yesterday evening, Money 2.0 was on the agenda in the Arminius church in Rotterdam. It was an evening in which I briefly outlined some of the major developments and lessons from monetary history to the audience. This coincided with an announcement of the Federal Reserve Board on their monetary policy, that may prove to become a historic case in point.

Balancing the amount of money against economic activity
I explained that history learns us that the amount of money in a society needs to balance the economic activity. The role of central banks is to monitor both and make serious judgment calls as to whether or not contract or expand the so-called monetary base. Expanding too much may lead to high inflation, and a more restrictive approach can lead to deflation. Finding the right balance is thus the essence of monetary policy.

I sketched that each country has in the past experienced a different learning curve in executing monetary policy. These differences help to explain why the German central bank (and the ECB, in its first years of existence) tend to be restrictive and careful not too expand the money base, while the FED appears to lean towards easing the money supply. As if to prove my point, at that very moment, the FED informed the markets that they were delaying their planned contraction of the monetary base until the economy would be seriously better.

Now, let's see where this might be coming from.

Different lessons lead to different central bank styles
First, we will look at the situation in Germany between the two World Wars. Germany had to pay France a huge amount of money as 'repair' payments for the damage done in the war. A sequence of events in 1922 however makes it clear that the Germans will have a hard time paying back their money. And as a part of the conflict between France and Germany, the Germans start printing money, to finance a strike in the industrial area of the Ruhr. The cumulative effect of the developments - see Kindleberger-  was hyperinflation and even the Dutch still recall this (some of us are still holding worthless million mark notes of those days).

Now, let's have a look at the United States at the end of the 19th century. We can see a depression, deflation and a shortage of money. And there is a serious debate as to the use of gold or silver as a standard to base the currency on. This discussion even filters down to a book, the Wizard of Oz, as Hugh Rockoff explains here. In short, the US experience is that you have to be careful not to have a shortage of money.

As both memories linger on in the collective minds, we can thus see that the German central banking approach is not to ever encounter high inflation again. They tend to be on the careful side and tried their utmost to instill this sense of discpline in the European Central Bank. Meanwhile, the FED is making sure not to ever encounter a shortage of money again, so are expanding their money base more easily.

Delayed tapering: a historic moment ?  
When the FED yesterday announced that they were not yet going to contract the money base, this came as a surprise to the market. Earlier this year, Bernanke had explained that the FED would slowly start contracting the money supply. So he caught the market off guard. And in a few years, we can determine if that was indeed a historic moment. I think it was.

The FED-announcement above all marked the beginning of an unclear policy. So far the FED has been careful to explain and predict its own moves to the market by providing so-called forward guidance. While a bit unconventional, the market has been getting used to this guidance and has also responded to the earlier announcement of more restrictive monetary policy. This response may in turn have led the FED to change its previous opinion on the timing of tapering.

What may happen now is that the market and the FED get entangled in a dance where neither party knows whether to lead or to follow. Both are looking at each other while trying to find out if the economy itself is getting in a better or worse shape, as a result of their dancing. Rather than leading the dance, based on the music, the FED is now adapting to the dance partner as well.

It's this ambiguity of the FED and increased unpredicatbility that may well make yesterdays announcement a historic one.


Morality meets money on Filosophy Night (12th of April) in Amsterdam

Morality and Money. Two concepts that are - whether you like it or not - infinitely intertwined. As we witness European funds and cash being sent to Cyprus, we can also observe that a number of conditions are attached which seek to address concerns as to the 'tax haven shelter' or money laundering nature of its financial sector. In a similar way it is impossible in todays Dutch society to cheerfully announce anything on the topic of bonuses, without ending up in a moralistic debate. But the link between morality and money is far deeper than that.

On the evening of the 12th of April, the Beurs van Berlage in Amsterdam becomes the venue of the so called Philosophy Night. It's an evening organised by the Dutch Philosophy Magazine and has a dense programme of lectures, discussions, interviews that all revolve around the relation between money, philosophy, morality and guilt. Visitors will be able to choose among many sessions to discover the views of philosophers, journalists, bankers, politicians and artists. While most of the programme is in Dutch, the English-spoken part of the programma itself contains a very nice line up with Michael Sandel, Thomas Sedláček, Jules Evans and Donna Dickenson.

Sandel is of course well known for his college sessions on Justice and the moral limits of markets (on which he wrote in: What Money can't buy) and he will be the main guest that opens the evening. Later on, that night, Tomas Sedláček will give a presentation on the main theme in his book: the Economics of Good and Evil. He argues that economic discussions are so intertwined with culture, art, philosophy etc that discussions on economics boil down to questions of good and evil.

Jules Evans, author of the book Filosophy for Life, will be discussing how the Stoic way of thinking may be helpful in liberating ourselves from the chains of commerce and the addiction to money, power and status. And finally Donna Dickenson will be interviewed on the subject of selling body parts for money. What are the practices, how far can this go, should there be a limit?

The fact that these subjects are discussed in the Berlage Exchange Building is quite symbolic by the way. It's designer, Berlage, has chosen to translate his and Albert Verweijs view on the future development of society into the artwork of the building. And that view was that there would be an inevitable further development from an industrial society to a new society in which money and trade no longer exists and man/women live equally and happy ever after. So even the building is engaged in the debate of that night.

To see this, just look up when entering the building, on the 12th of April and you'll see a carving in relief of people grouped together. Below are the verses by the poet Albert Verweij which (translated) say:
`The earth will soon be one: its peoples are groups all,
forming one great union the wide world round.
Ships on the sea advance, trains over land
to varying ends as they go they call'.

See for more info the English Page of Philosophy Magazine here.


History of nationalisation of SNS unfolds quickly .... it's not the endgame that matters

Yesterday evening, the Dutch RTL-news released a number of confidential documents about the supervisory and regulatory discussions on SNS Reaal Group. And while it could be expected that bits and pieces of this process would slowly enter the public domain, I must say this is a very rapid disclosure. It also allows a further reflection on the very recent financial history: the nationalisation of SNS Reaal Group.

The endgame
The details of the latest discussions, just before the nationalisation, are highly fascinating. We see the board of SNS fighting for their bank, clinging onto the hope that:
- the regulator sees that the valuation of the possible losses in property finance should be lowered,
- hence, nationalisation cannot be considered a valid legal option (as any loss would not be sufficient enough to trigger the legal nationalisation bazooka),
- thus: the CVC offer stands a good chance of continuing.

Meanwhile the regulators' view is also quite clear. DNB, the central bank and supervisor, has been very patient and lenient in allowing the search for possible private-public solutions. But at some point they have to draw the line. This point arrives when the SNS-CEO and CFO explain in January to the Minister that it is either the CVC bid or nationalisation. Perhaps they hoped that this would force a momentum for the CVC-rescue.

Instead, this statement may have finally convinced the Ministry of Finance and DNB that a nationalisation was indeed the only option. The proposed deal of CVC did indeed, as our Minister of Finance explained during a press conference, contain too many goodies for CVC with too little compensation for the State. Furthermore, as I was expecting, CVC was asking for something impossible: the committment of the supervisor not to intervene in the coming years. In sum, the private-public rescue action was nowhere near to a solution that suited both the business and the regulatory constraints.

2011- and later... working towards a solution
The RTL-papers also clarify the run-up to the nationalisation. It's interesting to note that at the end of 2010, the supervisor observes that SNS Reaal Group is undercapitalized and unable to really wheather a further storm in the market or the media. From that moment on, all work is geared towards eliminating the risks in the portfolio and getting SNS Reaal to take all necessary action, including the sale of parts of the company.

I think 2011 also marks the start of a period in which both DNB as a supervisor and the Ministry of Finance become aware of the fact that some form of rescue may be necessary. But it's a different rescue this time. There are obstacles that stand in the way of the usual solution: inviting the biggest Dutch players and working out a way to safeguard continuity. This did still work for the smaller Friesland Bank (absorbed by Rabobank), but is impossible for the more complex SNS Reaal Group.

As FT Alphaville puts it, the SNS demise was an accident waiting to happen. While bank board and supervisor were doing their utmost to save the bank, the losses and problems were just too much. In this respect it should be noted that in these years, the politicians did a good job at confusing and complicating the financial markets with their prolongued sovereign crisis. In combination with all the post-financial crisis measures, this meant that there were no buyers or parties in the market that would be interested in helping solve the SNS problem. At the same time, SNS could benefit from the crisis by using ECB-funding to buy time.

Essentially we can see that the years 2011 until the beginning of 2013 all eyes were focused on getting to save SNS Reaal. And in that time the so-called Intervention-law (allowing nationalisation) was also being developed and ratified. It think that this law and the principles of trying to seek a private solution within its regulatory framework, focused the minds of all persons involved, whether bankers, supervisors or civil servants.

But is it the endgame that matters?
We should note that the true accident happened in 2006 when SNS did not limit its risks when taking over Bouwfonds Propery Finance. In doing so they exposed themselves to a continued drain on their profits and capital, which they were unable to neutralize. When the financial crisis further evolved and lead to a further worldwide change in risk and capital attitudes, the situation had essentially become unsustainable. SNS Reaal had become, in the Netherlands, the elephant in the room, that no one dared to discuss.

This leaves us with an interesting but highly hypothetical scenario. What would have happened if, at the end of 2010, the supervisor and Ministry of Finance would have stepped back a bit further. Suppose that they would have outlined that any resolution for SNS Reaal Group would have to occur in a stressed market. Which is a market in which it is hard to expect to get a good deal. And thus, they could have argued, while the financial stability of the market was not (yet) at stake, nationalisation of SNS Reaal or ringfencing of some of its activities were essentially the only two options in 2010.

My guess is that the public might have resented such an approach as being too premature. Yet, if we truly wish proactive supervision, we must also be willing to allow unexpected and early interventions, rather than just the end-of-the-road nationalisations. And it is in this respect that the current Intervention law doesn't help. It details a roadmap for the last part of the journey of a bank in despair, and thus focuses all energy of the involved players on remaining within that roadmap. As such it blocks and diverges the attention from other solutions that might have been possible and useful on the earlier bits of the road.


Financieel Erfgoed op de Kaart: opening digitaal museum over financiële geschiedenis

Vandaag lanceer ik officieel de site: 'Financieel Erfgoed op de Kaart'. Dat is een online 'virtueel' museum, dat de financiële geschiedenis van Nederland ontsluit op basis van de lokatie (Google Maps). De verhalen uit die geschiedenis zijn te vinden door in te zoomen en te klikken op de i, of door het menu rechts onder Amsterdam verder uit te vouwen en een informatiepunt te selecteren.

Ik heb Financieel Erfgoed op de Kaart gelanceerd om de verborgen verhalen uit de Nederlandse financiële geschiedenis op één plaats te ontsluiten en bewaren. Overal in het straatbeeld zijn namelijk nog sporen te zien van de financiële geschiedenis. Maar de verhalen erachter zijn niet altijd meer bekend, terwijl ze toch nog steeds boeiend en relevant zijn.
Foto: P. Louw, 2005
Neem bijvoorbeeld de Munt in Amsterdam. Dit gebouw is slechts één jaar in gebruik geweest voor het slaan van munten. Het gebouw brengt ons terug naar 1672 waarin Nederland onder de voet werd gelopen door Frankrijk, Engeland en twee Duitse prinsen.

 In feite bleek toen dat Nederland, als klein land, voor haar zelfstandige voortbestaan altijd erg afhankelijk is van de omringende landen en er het beste aan doet zich te voegen naar de dynamiek van de grote buurlanden in Europa: een inzicht dat ook nu nog steeds relevant is.

Op www.financieelerfgoedopdekaart.nl kan een bezoeker vanachter de PC thuis een 'wandeling' door het financieel erfgoed maken. En wie zélf op pad in Amsterdam is en de site op de smartphone opent, ziet de informatie over de meest nabije historische plaatsen getoond in een menu. Ook kan de augmented-reality toepassing Layar worden gebruikt. Op dat moment fungeert de stad feitelijk als openluchtmuseum.

In dit digitale musuem staat het verhaal van de financiele geschiedenis centraal. Per lokatie komt een deel van die geschiedenis aan bod: een persoon, een gebeurtenis, een gebouw of een organisatie. Op elke plek wordt informatie en audiovisueel materiaal gebundeld die normaal gesproken op allerlei afzonderlijke plaatsen te vinden is: de archieven van financiële instellingen, foto's uit de beeldbank, kennis uit wetenschappelijke artikelen, de collecties van musea, gedenkboeken, wikipedia enzovoorts.

Het platform richt zich nu nog op Amsterdam en is tot stand gekomen in samenwerking met het stadsarchief Amsterdam, het Amsterdam Museum en het Joods Historisch Museum. Het zal door samenwerking met universteiten, lokale museau en historische kringen in de komende jaren uitbreiden naar andere plaatsen in Nederland.

Daarnaast staat ook een Engelstalige versie op stapel, vooral gericht op de buitenlandse bezoekers/bewoners van de stad Amsterdam. In het Comité van aanbeveling voor dit project hebben zitting: K. Knot (President van de De Nederlandsche Bank), E. van der Laan (burgemeester van Amsterdam) en J. Jonker (Hoogleraar Bedrijfsgeschiedenis Nederlands Economisch Historisch Archief).