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Catching a Falling Financial Knife

Hackers and the Alternatives to the Global Financial System

Politics / Global Financial System Jan 29, 2013 - 04:34 PM GMT

By: Submissions

Politics

Keith Hilden writes: We find ourselves as a world currently at a pivotal point where the current maligned global financial system is falling way to multiple alternatives as new global financial system models emerge as solid competitors. Hackers will undoubtedly prove themselves as a disruptor to the alternative new financial system frameworks that emerge, and will sculpt the initial framework into its matured institutional state. Due to the leverage that hackers will possess, emerging alternative global financial system frameworks will be heavily influenced by hackers. Simply said, regardless of which global financial alternative is chosen, hackers will own the day. And investment into cybersecurity firms products and services will absolutely skyrocket.


The current stresses on the global financial system are tearing global frameworks at their seams and sparking the emerging of alternative global financial system frameworks to replace them. These stresses are in turn being responded to by multiple converging forces delineating the structure of a new global financial system. These are the forces around the world that will compete against one another to gain influence and acceptance in the rush for the next global financial system consensus.

Gold currency
Kota Bharu, Malaysia: In this small border town on the Thailand-Malaysia border lies a city that already offers the alternative to get paid in gold and silver coin, and thousands of shops accept this coinage as a payment option. This small town and its successes or failures may very well be the catalyst spurring the world into a gold-backed global financial system. The World Islamic Mint in concert with the Kelantan government of Malaysia have issued Gold Dinars and Silver Dirhams that with the blessing of the Kelantan government have been approved as legal tender. The Kota Bharu gold dinar initiative also has the unofficial backing of the Malaysian central bank through their limited production of the Kijang Emas, a legal tender gold coin for transactions within Malaysia. Workers have the option of being paid in Dinars and Dirham or the traditional Ringgit Malaysia currency. The Kelantan government is the first in the modern world to offer gold and silver coinage as alternatives for payments of goods and services. The Malaysian gold legal tender status in 2010 spread to Utah in 2011 and South Carolina in 2012. If the Kota Bharu gold rollout is successful, expect all of the provinces of Malaysia to get the nod from Bank Negara Malaysia to get full central bank sanction of gold coin as currency within Malaysia.

The World Islamic Mint is based in Dubai. This is a country that already has gold bars in vending machines. If the Malaysian experiment proves successful, we could be looking at a gold-backed Middle East along with Malaysia and Indonesia. We could very well be looking at the return of the global Islamic gold dinar throughout the entire Muslim world if Kota Bharu succeeds in its aims.

Yet the gold standard will also be susceptible to cyber attack its goals potentially impeded. A cyberattack campaign on countries that go the way of gold-backed currency will be no different in structure than a traditional cyberattack today. Digital 1's and 0's can be pilfered the same way they are with the current financial system. We live in the age where the server where the cyberattack comes from is more important than the location of the printer, whether it be a paper currency, gold coin, or digital currency. And a state-sponsored directive with the goal to weaken a country's currency via cyberattacks designed to cripple the banking process and its resultant commerce would be just as effective in its goal in a gold-backed currency system versus a fiat incumbent one. Only a full gold non-fractional financial system would not be vulnerable. However, the current price of gold makes full gold currency systems for now an unrealistic proposal until the price for implementation of a full gold financial system is a reasonable amount. Thus, hacking efforts in a gold-backed currency system will not be able to shield itself from cyberattacks, ATM 'glitches' and other financial digital calamities.

While currency in circulation would not be affected directly by a state-sponsored thousand grains of sand persistent cyberattack, the currency would still be vulnerable within a fractional reserve banking system. The appeal of gold in circulation is its perception of a stable store of value.  And that perception of stability is just that, a perception, when the gold in circulation pales in comparison to the digital 1s and 0s that comprise the majority of the financial system today. Add in derivatives and other financial instruments that dwarf the amount in currency, and we see that simply having a gold currency does not shield against a debilitating cyberattack against its foundation.

There is about $17 billion dollars in circulation in Malaysia, so to replace that currency circulation with gold at the price of $1700/oz would require about 312 tons. Malaysia has around 36 tons of gold as of 2012, and those holdings of gold is insufficient to be able to transition to a fully gold ringgit. Therefore, the system would be at most a gold-backed ringgit in which there would still be fractional reserve banking practices, and as such, the digital money on ledgers not callable by either paper or gold monetary instruments would still render Malaysia or the United States vulnerable to a cyberattack on its banking system, gold-backed or not. There is in contrast$1.13 trillion US dollars in circulation, of which it would take a whopping 20,772 tons of gold to replace U.S. currency in circulation at a gold price of $1700. 

Clearly, there is not enough gold available through current price levels to fully replace either the U.S. dollar or the Malaysian ringgit with a gold currency, and so the move would be a gold-backed fractional reserve currency model. This means that there would not be enough physical currency- gold backed or not- to be able to cover a traditional run on a bank. Hence, a digital snatch and grab on these banks without enough in fractional reserve to cover the losses would still leave them vulnerable to cyberattacks, gold-backed or not.

However, Switzerland is a country to watch when considering the emergence of the next global financial system. Consider that exports in recent months to Switzerland from Thailand are up dramatically. And most of it is gold and other numismatic stores of value:

"Switzerland bought $1.17 billion of Thai goods in September, ten times more than a year before. Of that, 95% was gold, precious stones and jewellery."

Certain countries might be able to pull off a gold-backed currency, but there are clearly some countries who will be stuck out in the rain having to use fiat or one of the alternatives to gold as their country's currency.

Mobile phone payments- The Nairobi Model

Nairobi, Kenya The M-PESA cell phone payment system was the first in the world to offer payment of products and services by using nothing more than a cellular phone. Current limitations of the present financial system coupled with a lack of financial infrastructure in Kenya resulted in the country leapfrogging past brick and mortar financial institutions into the world of mobile payments. Other countries such as Tanzania and Uganda are following in Kenya's footsteps, and the endgame could be digital payments outpacing cash in developing countries that embrace mobile payment solutions over brick and mortar institutional solutions.

Mobile payment systems replacing paper currency render every transaction to DDoS on payment processors, man-in-the-mobile attacks, fake wifi and/or malicious 3g/4g connections. Every transaction would be able to be tracked and logged, with the double edge being transaction data being both trackable and data minable for both companies and criminals alike. Satellites become much more important attack surfaces for compromisation of payment transaction 'transmission vehicles'. And with only needing a SIM card to send and receive payments via phone, much looser authentication frameworks are present which means everyone is a store owner and can receive payments.

Mobile payment systems are only as good as the platform they run on. And a weak platform will mean many people will have unfortunate accidents with their money. Thus this option will only be as popular as can be proven of its safety. Many private companies will step in here and try to prove that their latest solution will cure the world's ills. Those that break through will be darling companies in the investment community, and will do well for their investors.

Biometric payments

Ibiza. Biometric payments for trendy techie hotels puts this gamechanger in the initial breakout stages. Turkey's ISBank has rolled out thousands biometric ATM machines. Japan's Ogaki Kyoritsu Bank has started to offer palm biometric ATM machines. And this October of 2012 biometric payments are rolling out in custom trials with certain stores in France. While clearly in the adoptionist phase of its technology, biometric payment systems are rising in popularity, and are a direct challenge against other traditional payment systems.

Replacing traditional transaction methods don't just log every financial transaction, it logs every border-crossing, employment application, healthcare visit, and embarkation onto public transportation. Simultaneously, the cost for becoming a victim to identity theft becomes exponentially higher as even more functions of daily life are made extremely difficult for those unlucky enough to have their biometric data stolen and replicated and re-sold on the black market. As the value of black market biometric data explodes, hackers will increasingly focus their hacking efforts on pilfering irises, fingerprints, and other biometric data.

Hackers have the ability to disrupt these 3 flashpoint breakouts in disruptive new rulesets by different means. And the form that cyber operations take will also define how successful the implementation of these disruptive gamechangers are when these models are faced with coping with persistent attempts of compromising their advance, and hindering their potential ubiqituous use. What this means is that these three forces are battling it out to gain as much influence and acceptance as possible, and the winners will foster strong companies. The global financial system transitioning from fiat means an incredible amount of wealth being controlled in new ways. And who is positioned for these changes will be the gatekeeper of the new global financial system. Which of these sectors turns out to be the winning horse will make many an early investor a handsome fortune.

By Keith Hilden

unlimitedinsights.blogspot.com

Keith Hilden holds a degree in Economic Crime Investigation and researches Asia Pacific and Cyber Security issues for Wikistrat. He also is a contributing analyst for 2point6billion and Fair Observer.

© 2013 Copyright Keith Hilden - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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Catching a Falling Financial Knife