Money and games

I’ve been thinking about games again, mainly because my good friend and futurist Lynette Nusbacher has been play testing a Brexit negotiation game as part of the fascinating work she does helping governments and businesses with their scenario planning.

I’m really looking forward to playing it as part of the Wessex Separatist faction. I love tabletop games. My favourites are, I imagine, the same as everyone else’s: Settlers of Catan (which many believe to the be the best board game of all time), Dominion, Carcassone, that sort of thing. My sons and they friends’ recent favourite was Game of Thrones (and we had a few late night sessions with all of them around the Westeros map) but we’re currently into Wasteland Express, which is a sort of Mad Max (or The Domestics) meets the commodity markets resource trading game, so when we’re not playing Dungeon & Dragons 5e, we’re playing that…

Wasteland Express

 

It’s a very good game with excellent mechanics. You’re basically like Furiosa driving a war rig across a radioactive territory full of bandits and you have to try to figure out which commodities to trade, which upgrades to shoot for and so on. It fun round the table and gives the kids as good insight into the Hard Brexit Option as outlined in the Daily Mail. I was thinking about it because at a recent event someone asked about games to teach children about money (now that they don’t have play money any more) and it reminded me of some things I’d written about games and payments before! So I’ve pulled a couple of pieces together here to tell about my experiences using games to teach my kids about money, payments and financial services.

My experiences start with the time when I dusted off my copy of the “The Diners’ Club Credit Card Game”, published by Ideal in 1961. This was time when cards were far from a mass market proposition, so it looks to me as if the promotions people at Diners had had the idea of using the popular genre of the board to game to raise awareness of what exactly a card did and why anyone might want one.

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It’s nice game, a little random, but it works ok. It teaches you to spend for big-ticket items on your card so that you keep cash in hand for other purposes (investments etc). It didn’t take long to pick up and get going and we had fun playing it but to be honest I’m not sure if the youngsters would, unprompted, pick up and have another go.

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Having helped younger members of the community to understand what a card is, it was then time to move on to a more sophisticated game. I broke out “Charge It! The Credit Card Game”. The original version of this game seems to date from 1972, when the combination of technological and regulatory change (ie, the introduction of the magnetic stripe and Visa’s BASE I authorisation system together with the change in state usury laws) were pushing credit cards to the mainstream. My version of the game is a later revamp from 1996, in which players collect up to four different cards (thinly disguised Visa, MasterCard, Amex and Discover schemes) and move around a board collecting stuff of one form and another. Here’s no.2 son defying his father by using cash to purchase at carphone for $400, having first had to ask me what a carphone was.

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When we were playing D&D (3.5e) around the same time, we were playtesting a Viking-themed variant with some house rules removing arcane magic from the game and adding a couple of new character classes (the Beserker barbarian variant has always been a great favourite of mine). Variants are a great way to have more fun so I decided to make “Charge It!” even more fun by replacing the pretend cards with real ones, but I’m sure your family would have just as much fun with the cardboard echoes.

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Dungeons and Dragons isn’t very good for teaching about money or payments because it involves the use of magic, which is an endogenous growth factor in a medieval economy based on scarce commodities and plentiful labour. I know politicians are fond of saying that there is no magic money tree, but on the Sword Coast, there is. So while D&D is good for getting kids interested in history and adventure, it’s not so good for economics.

Which brings me to another point. When I was reading up on the background to some the games discussed here, I noticed that they were classified as “economics” games. I think I take issue with that. I suppose you might argue that they are about economics in the original sense of the Greek root (ie, household budgets) but they don’t really teach modern economic concepts. The games are about payments, but they are not really about money or the financial services business. My kids learned about the world of finance from games, of course, but they learned from:

  • World of Warcraft. All parents should insist their children play this game while at middle school. My kids learned all of the key economic concepts from playing this game: supply and demand, comparative advantage, price curves, options and futures, auctions and reverse auctions, arbitrage and so on. They also learned all of the basic tools of the modern investment banker, including market manipulation, price-fixing, insider trading and shill bidding. It’s a shame they have both opted to study socially-useful STEM subjects at University instead of finance, much against my direction.

  • Crunch. This is a card game that teaches the rudiments of banking, and it’s a f. Each player is a banker and, in essence, you have to collect asset cards so that you can make loans and investments. The really clever (and super realistic) part of the game is that the banker with the most money at the end wins: it doesn’t matter whether their bank goes bankrupt or not. If you over-extend the bank but manage to trouser the treasure before the roof falls in, more power to your elbow.

  • Illuminati. This remains my favourite table top card game of all time and I’m glad my kids loved it too. It has a superbly clever game mechanic which means that you build up power structures based on secret societies (e.g., The Gnomes of Zurich) but you need money to consolidate the power and you basically can’t win without screwing someone else over. A much better introduction to 21st-century pseudo-capitalist corporatism than any text book.

Meanwhile, back at “Charge It!”, I’ll just mention that I liked the two-track board idea and I thought it worked well in terms of game dynamics. You basically choose whether to go round an outer track or, once you have some credit cards to your name, an inside track with different kinds of interactions. The players don’t know what each other player is trying to collect so you have to keep an eye on what your opponents are buying as the game develops. We enjoyed playing this game and I think we might well play it again sometime.

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It was then time to return to an old favourite, Monopoly. Now, the truth is that I’ve never much liked Monopoly (it’s too random for my liking) but my kids liked it when they were small and had never played Space Crusade or Heroquest. They still play it now and then (the World of Warcraft edition is the current favourite I think). When I play tested with them, I started with our copy of Monopoly Electronic Banking edition, which replaced cash with cards some years ago and thus obtained my deputy-head-of-household seal of approval.

An interesting aside: At Consult Hyperion’s tenth anniversary Forum back in 2007, the wonderful people at Hasbro very kindly donated a few Monopoly Electronic Banking sets to the event and we ran a tournament using them! Within a couple of years, our thoughts had naturally turned to mobile and contactless, so we played a version of the game using contactless cards and NFC phones using some software that I pestered our in-house development team (the “Hyperlab”) to put together for the event.

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And so we meander closer to our post-crash finance landscape, with our next stop at a game of Monopoly Zapped. In this game, the players have cards (with no embossing any more, unlike the replacement payment cards sent to me in last month by my actual card issuers) and the “bank” is your own iPad rather than a custom piece of hardware. How right this is, on so many levels. To effect a transaction, you simply touch your “ID card” to the iPad when necessary.

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The family verdict on this one was very positive indeed. The contactless interface was quick and simple, it was convenient having the iPad keep track of everything and the game play zipped along at a decent pace. If your kids like Monopoly, they will like this how it is enhanced by mobile phones and contactless payments.

Which brings us to the cryptocurrency era. In 1961, Diners’ Club needed a game to teach people about cards. In 1972, “Charge It!” taught people about credit. Monopoly Electronic Banking introduced a cashless economy and Monopoly Zapped the contactless economy. So I think it is time to create a game to teach people about cryptocurrency. I’m thinking either a combination of Crunch and Illuminati that builds the blockchain on the table in front of the players with some kind of Trivial Pursuit-style game to represent the distributed proof-of-work or a combination of Cluedo and Monopoly where the goal is to find the Satoshi (“It was David Chaum, in the library, with a TRS-80”) while hoarding your Bitcoins and stealing your opponents.

While I was kicking around some ideas on this I remembered the fun I’d had with “The Privacy Game” back in 2012 as part of a project called VOME with the UK Technology Strategy Board. The idea of the project was to help people who are specifying and designing new, mass-market products and services to understand privacy issues and make better decisions on architecture. Part of the project was about finding different ways to communicate with the public about privacy and factor their concerns into the requirements and design processes. One the experiments was a card game lead by Dr. David Barnard-Wills from Cranfield University. I was involved in playtesting it.

Turned out that David and his team had invented a pretty good game. Think the constant trading of “Settlers of Catan” with the power structures of “Illuminati” mixed with game play of “Crunch”. I liked it.

You get cards representing personal data of different kinds. Depending on who you are (each player is a different kind of business: bank, dating agency, insurance company etc) you want different datasets and you want to link them together into your corporate database. A dataset is a line of three or more data items of the same kind. Here’s a corporate database with two datasets in it: the green biographical data 2-2-3 and the orange financial data 3-3-3, these will score at the end of the game.

There are event cards, that pop up each round to impact the play, and some special cards that the players get from time to time. Check out the database I ended up with in the game that my colleague and I won! I was the bank, so I was trying to collect financial data in my database but I was also trying to collect social data (purple) in my hand.

I remember having great fun playing this, so I decided that something based on cards would be good for my Bitcoin game (especially given the deep irony of Mt. Gox having started life as a shrine to Magic The Gathering) and got to work. Anyway, I started to make a prototype, let me know what you think…

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I also had the idea for decoupling the market price from the underlying value with proper Illuminati-style secret market manipulation so that the players with Bitcoins will try to work together to drive up the market price. As with Crunch, the goal is to amass a personal fortune even if you bankrupt widows and orphans in the process.

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My original idea was that there would be something like 100 wallets, each with a two digit number (00-99) and when players create a new wallet they get to pick the next card from a shuffled deck. So each player knows which wallets are theirs but the others do not. Money gets transferred between wallets according to some kind of trading that never finished properly working out yet and the players try to nudge the game so that more money ends up in their own wallets.

At the end of the game (when the last coin has been mined) the remaining wallets are given to their owners and the contents added up so the person with the most money wins. At any point in the game, players can prove ownership of a wallet and cash it out into $$$. Players will be trying to hack each other throughout the game and will gang up to stop the richer players from winning.

I’ve been back to this a couple of times but I haven’t thought it all through yet, but basically unconfirmed transactions go onto the table and when player gets a puzzle question right (or maybe all the players are given the same puzzle?) they get to add the unconfirmed transactions to the blockchain and win an extra Bitcoin for themselves. I did have an idea for some “Uncontrollable Event Cards” from the game:

  • “Hard drive crash, lose all of your Bitcoins”

  • “The exchange has been hacked, lose all of your Bitcoins”

  • “The dog ate your cold wallet, lose all of your Bitcoins”

  • “Your favourite exchange turns out to have been a scam, lose all of your Bitcoins”

  • “Your PC is infected with malware that stole your password, lose all of your Bitcoins”.

It’s got winner written all over it, but on the outside chance that one of you may have a better idea, I’m all ears!

Internet giants will be the banking front-end

A few months ago I wrote about the idea of an Amazon bank and expressed a certain amount of scepticism that Amazon would want to become a regulated financial institution, especially give the alternative of becoming the higher return-on-equity distribution mechanism for the lower return-on-equity heavily regulated financial products. At the time, I noted that almost half of US consumers surveyed said that were “open” to the idea of Amazon as the provider of their primary bank account. Now I see a survey from the management consultants Bain that says that two-thirds of Amazon Prime respondents would be willing to try a free online bank account offered by Amazon and a third of people who don’t buy from Amazon at all would do so.

The Prime figure is especially important because Amazon customers control three-quarters of US household wealth, which is quite an incentive for Amazon to step in between the banks and their customers. But I think my original point stands, which is that Amazon can do this without becoming a bank. Alex Brazier from the Bank of England put it clearly in a speech earlier this year, noting that “by allowing customers to connect to a range of banks and service providers through a single point, Open Banking could open to the door to the ‘unbundling’ of banking”.

I don’t think there’s any “could” about it. In fact, it could be argued that that’s a good thing – assembling optimal (for the customer) bundles of services from different providers is actually quite an appealing vision of the banking front-end of the future. The problem, from the banks’ perspective, is that that the front-end neither needs to be a bank nor wants to be a bank. Quite the reverse, in fact. The people who are good at front-ends (eg, Amazon) are perfectly happy to take control of the interface with the consumer and leave the banks as heavily regulated, low margin pipes sitting out of sight as the equivalent of utility companies but for money rather than gas, water or electricity.

Bain talk about a “a cobranded, mobile-friendly, checking-account-like product” which may well be what is achievable in the US market but in other markets around the world where the regulators are pushing through open banking to force more competition into the financial sector, I don’t see why Amazon would cobrand. My guess is that things will go the other way: customers want the Amazon brand, they couldn’t care less whether their Amazon Account is actually held by Santander or ING or Danske or anyone else. They’ll probably never read the small print to try and find out.This is why, I imagine, that a few months ago Bain said that in the UK the banks could see between one and two billion of annual pretax profits vanish because of open banking disintermediation unless they take some pretty dramatic action.

But what can they do? Well, they can become technology companies. Now, I know that the “meme” that banks are, essentially, a special kind of technology company (special because they are granted special privileges that other companies do not have, such as the ability to create money) is not mainstream, it deserves attention. It means, apart from anything else, that bank boards will need to include switched-on technologists and take a strategic view of technology, as Christian Edelmann and Patrick Hunt said in the Harvard Business Review: “Technology specialists will play a greater role in allocating investments, working alongside senior management from a more traditional background”.

From my early experiences as an advisor to boards in the FinTech space, I can see the dynamics at work here. To pick an obvious topic, some financial organisations’ early response to open banking was to see Application Programming Interfaces (APIs) as something to do with technology and therefore not strategic. This left them on the back foot against those organisation who saw the real context. All of which points to the future signposted by my old friend Brett King in his new book “Bank 4.0”, in which he says that the foundation of banking in the coming era is “being great at technology”.  In his closing chapter on “The Roadmap to Bank 4.0” Brett quotes Francisco Gonzalez, the Executive Chairman of BBVA, as saying that sooner or later it will be the internet giants (including Amazon) who will be his main rivals rather than other banks. This is why BBVA is reinventing its processes to being new products and services to the markets. Other banks are, of course, trying to do the same.

But can banks really become technology companies? Many observers think not. Instead they posit a future for banks as financial factories who have to accept the new order and partner with Amazon and others. Lenders would manufacture financial products, and tech giants would serve as distribution and servicing channels. In other words, Amazon’s future is to do with financial products what Amazon already does with other products. What’s more, as that Bloomberg article notes, because Amazon wouldn’t have to pay to lure customers — it already has millions of them — it could afford to set up digital accounts without “all the nuisance fees and relatively high minimum balances” that lenders impose. The Wall Street Journal says similarly that banks “face pressure to build relationships with big online platforms, which reach billions of users and drive a growing share of commerce” when reporting on Facebook’s request to banks to share detailed financial information about their customers, including transactions and balances, “as part of an effort to offer new services to users”.

(Remember, in Europe the banks won’t be able to say no to this.)

This transition for banks, the transition to operationally-efficient manufacturing of financial services while others take care of the distribution, will undoubtedly have casualties. It is no exaggeration to say that it is not clear that all of today’s retail banks will survive it.

Get your Bristol Pounds here

Bristol is a great city in the west of England. It was the big city to me, because I grew up in Swindon, some 40 miles away from this metropolis, and can well remember visits to its attractions. These included an ice rink and the Colston Hall, where I saw the first ever performance by a popular beat combo for which I saved good money and paid for the ticket myself. It was the Sensational Alex Harvey Band, fronted by the eponymous hard-drinking Glaswegian and featuring theatrical lead guitarist Zal Cleminson. What a band! Their music will be continue to be celebrated the length and breadth of the land when Ed Sheeran is nothing more than a wikipedia footnote in the history of Soma-music for the masses. But I digress.

These days the city, while famous for its excellent University and other cultural attractions, is more noted for its contribution to the evolution of next-generation money, being the home of the Bristol Pound (the B£). Here’s a B£ fiver, accepted at par at a number of local merchants. The notes are lovely: this one features art from local children.

Bristol Pound

Now, while the notes are lovely, they have one distinct feature that sets them apart from the Bank of England’s rival product: they carry an expiry date. I think this might be something to do with the law of the land and crude attempts to maintain the Bank’s monopoly over currency rather than an economic calculation about hoarding, but nonetheless it does mean you’d be unwise to stuff them under your mattress and forget about them. If you get one, get out and spend it.

Bristol Pound

The B£ has been around for a few years. It’s made the jump from paper currency to digital currency already and if you download the B£ app, then you can pay with it at a number of local businesses. Those businesses can also transfer money peer-to-peer within the system to pay their suppliers. I didn’t get a chance to try this out because to get a B£ account you have to have a Bristol postcode so I shall harass some poor student into to trying it out for me and report back. Meanwhile, here’s the app in action at the Watershed Cafe.

Bristol Pound

So why am I writing about the B£ now? Well, the B£ is about to undergo a pretty revolutionary change. To understand why, first recall that strictly speaking while the B£ has some characteristics of a currency (you can pay your council tax with it, for example) it isn’t an independent currency. Rather, it is a form of “currency board”, an arrangement that provides for a fixed exchange rate against some other currency. The B£ in circulation are backed by a 100% reserve held in another currency. In this case, the other currency is Sterling. That Sterling is sitting in an account at the credit union. So far, so Ecuadorian.

Talking about Sterling, you’ll recall that almost all of the Sterling in existence (well, 97% of it) was created as bank credit. This happens when you pop down to, say, RBS to borrow ten grand to buy a car. At this point RBS just invent the ten grand out of thin air on a spreadsheet somewhere and add it to your account. You then send his imaginary money through the faster payment service (FPS) to the car dealer and it ends up in their account. They pay some out in wages and it ends up in employees accounts. Some of those employees deposit it in the RBS and so on and on. I know it sound implausible, but I can assure you that it’s true: our money is just made up.

B£ don’t work this way. Right now, if you could go to the credit union to borrow B£, then could only lend you the B£ that they had received as a deposit from savers. This autumn, however, B£ are going to become real money, in the sense that they are going to start making the stuff up and lending it to small businesses in the community. The loans will be made in B£ and will be repayable in B£.

Bristol Pound

I’m very interested in the world of complementary currencies and am always curious to see new experiments in the field. In Meyer and Hudon’s paper on “Money and the Commons: An Investigation of Complementary Currencies and their Ethical Implications” at the Solvay Brussels School of Economics and Management (May 2018), they distinguish between “social commons” and “commercial commons” as frameworks for new kinds of money and these categories broadly correspond to the notions of private currency and community currency that I explore in “Before Babylon, Beyond Bitcoin”. The B£ is born in the social commons and is intended to stimulate economic activity with its community.

I used to be sceptical about this kind framework and much more interested in the commercial framework because a collection of interlinked community currencies seemed to me less economically efficient in aggregate. I still think this is true, but it may not be the point. I’m wondering if we may need to explore ways to increase economic activity within communities at the expense of inter-community transaction costs as a response to inequality and the unrest that it may cause. This has implications, because (as I wrote for Quartz recently) if communities rather than individuals become central to money creation then these currencies will be imbued with the values of the communities that create them.

This will be a really interesting experiment to see if a social currency can genuinely stimulate a local economy and, as I am very interested in the specific example of city-based social currencies because of my feeling that communities have some role to play in the future of digital money, I will be following the B£ credit experiment with interest and will report on its progress in due course.

Incidentally, I do feel bound to mention one obvious improvement that might be made to the app. I think a button to add a tip might be usefully provided.

Bristol Pound

By the way, I happen to have three of the lovely Bristol tenners on my desk even as I write and I will cheerfully hand them to the first three people who ask for them in the comments below so that they can visit that lovely city and try out some new money for themselves.

Happy Birthday Credit Card Industry

Today is a very important day for us payments nerds. It’s the 60th anniversary of the “Fresno Drop”, the birth of the modern credit card industry. On 18th September 1958, Bank of America officially launched its first 60,000 credit cards in Fresno, California, setting in motion an experiment that changed the American way of borrowing, paying and budgeting.

And, in time, changed everyone else’s way of doing those too.

If you want a good introduction to the history of the credit card, from the Fresno Drop up to the Internet, I’d recommend Joe Nocera’s “A Piece of the Action“, which I read many years ago and still pick up from time to time.

If you want to spend five minutes having a quick look at where the modern credit card business comes from, here’s the short version (courtesy of CNN Money)The most extraordinary episode in credit card history is the great Fresno Drop of 1958. The brainchild of a Bank of America middle manager named Joe Williams, the “drop” (which is marketing-speak for “mass mailing”) was an inventive tactic to give Americans their first highly addictive taste of credit card living. Keep in mind that charge cards in those days–like Diners Club or American Express–were mainly used by jet setters, businessmen on expense accounts, and ladies who lunched… Williams wanted to change that. In September 1958, he mailed out 60,000 credit cards, named BankAmericards, to nearly every household in Fresno. Mind you, these cards arrived in the mailboxes of people who had never seen–let alone applied for–a card like that. But now thousands of ordinary people suddenly found that thousands of dollars in credit had literally dropped into their laps…

There you go. Now you can go ahead and bore at least one person today with the story of the Fresno Drop. I know I will.

As you might expect, I cover this episode in my book Before Babylon, Beyond Bitcoin, where I point out that what is sometimes overlooked from our modern perspective is that the evolutionary trajectory of credit cards was not a simple, straight, onwards-and-upwards path. For the first decade or so, it was far from clear whether the credit card would continue to exist as a product at all, and as late as 1970 there were people predicting that banks would abandon the concept completely. What changed everything was a combination of regulation and technology: regulation that allowed banks to charge higher interest rates and the technology of the magnetic stripe and Visa’s BASE I online authorisation system. This changed the customer experience, transformed the risk management and cut costs dramatically while simultaneously allowing the banks to earn a profit from the business.

It looks more than a decade for the Fresno drop to turn into the mass market business, integral to the economy, that we know today. So what financial technology experiment of our days will be of similar magnitude a decade because of regulatory and technological change a year from now? My guess would be something to do with tokens, but I’d be curious to hear yours.

Tokens and Twincoins

For some time – since when I first began jotting down an outline for my last book, in fact – I have been boring clients, colleagues and carvings senseless with my mantra that while Bitcoin isn’t the future of money, tokens might well be. What’s more, as I have presented more than once, those tokens will have an institutional relationship with “real world” assets. Now I see that none other than noted cryptocurrency investors the Winklevii have launched just such as product. Gemini Trust, their cryptocurrency exchange, has won approval from New York finance regulators to launch Gemini Dollars.

These are tokens on the Ethereum blockchain that are pegged in value to the U.S. dollar (in other words, they are kind of digital currency board). State Street Bank will hold the reserve of one greenback for every token issued and, I assume, they will be redeemable on demand and at par.

Now, I know nothing about entrepreneurhip or venture investing or creating cryptoasset trading platforms, but I think they are on to something. Many people will want to hold dollars as digital bearer instruments rather than as a bank balances. When my smart contract sends a Gemini dollar to your smart contract, that’s pretty much that. It’s inexpensive and fast.

This idea of using cryptocurrencies to support tokens linked to something in the real world is hardly new. But it’s becoming something of a focus now. Kevin Werbach published a very good article about tokens on the Knowledge @ Wharton site recently. He set out a useful taxonomy to help with discussion and debate around the topic, saying that

  • There is cryptocurrency: the idea that networks can securely transfer value without central points of control;

  • There is blockchain: the idea that networks can collectively reach consensus about information across trust boundaries;

  • And there are cryptoassets: the idea that virtual currencies can be “financialized” into tradable assets.

I might use a slightly different,  more generalised approach (because a blockchain is only one kind of shared ledger that could be used to transfer digital values around), but Kevin summarises the situation exceedingly well. His perspective is that cryptocurrency is a revolutionary concept but the jury is still out on whether the revolution will succeed, whereas the shared ledger and the assets that might be managed using those shared ledgers are game-changing innovations but essentially evolutionary. The idea of such assets, which I will label digital bearer instruments, goes back to the long-ago days of DigiCash and Mondex, but the idea of implementing them using technology that is (in principle) available to every single person on the planet is wholly new. 

This combination of the revolutionary but unproven and the evolutionary but nevertheless game changing fascinates me and I’ve been exploring it in a number of different areas. One such area is money, of course, and more particularly the notion of central bank digital currency. I feel this is often discussed in a confusing way (not by me). I see articles on the topic that almost randomly switch between “digital currency”, “cryptocurrency” and “digital fiat” to the point that they are essentially meaningless. So I thought it might be useful to build on my work and Kevin’s perspectives to create a worthwhile framework for exploring the topic.

Let’s begin by exploring what the central concept is all about. Ben Dyson and Jack Meaning from the Bank of England discuss a particular kind of central bank digital currency (what some would call  “digital fiat”) with quite specific characteristics.

  1. Universally accessible (anyone can hold it);

  2. Interest-bearing (with a variable rate of interest);

  3. Exchangeable for banknotes and central bank reserves at par (i.e. one-for-one);

  4. Based on accounts linked to real-world identities (not anonymous tokens);

  5. Withdrawable from your bank accounts (in the same way that you can withdraw banknotes).

This seems to me to be quite sensible definition to work with. So, digital fiat is a particular kind of digital money with these specific characteristics. We can now start to fill in the blanks about how such a system might work. For example, should it be centralised, distributed or decentralised? Given that, as The Economist noted in an article about given access to central bank money to everybody, “administrative costs should be low, given the no-frills nature of the accounts”, and given that a centralised system has the lowest cost, that would seem to point toward something like M-PESA but run by the government.

There are, however, other arguments in favour of using newer and more radical technological solutions., not least of which is our old friend privacy. Again, as The Economist notes, people might well be “uncomfortable with accounts that give governments detailed information about transactions, particularly if they hasten the decline of good old anonymous cash”. However, as I have often written, I think there are ways to deliver appropriate levels of privacy into this kind of transactional system and the pseudonymity is an obvious way to do this efficiently within a democratic framework.

Aside from privacy, there’s another argument for moving to new technology rather than a centralised database, and it has come to the fore in the light of the recent Visa Europe systems collapse, which is what to do to make such a digital money system, 99.999% available. Here is where new technologies might be able to deliver the step change that takes us into the realm of practical digital fiat. Such a payment system would be an element of critical national infrastructure, which is why it might be worth looking at some form of shared ledger technology, possibly even a blockchain of some kind, in this context.

Here’s my take on the situation, then, with a diagram that I’ll be showing at Future Tense in Zagreb on 2nd October. It is congruent with Kevin’s taxonomy but adds the “digital identity” layer to show that the token trading might be pseudonymous in most practical circumstances within specified limits. 

Digital and Crypto Layers

 

In this formulation, we have a digital value layer that may or may not be implemented using a blockchain to create the bearer instruments, then a cryptoasset layer built on top of that (let’s put one side what the different kinds of cryptoassets might be as for this discussion I’m only interested in digital money) and then a digital identity layer on top. My assumption is that cryptoassets will be implemented using what some people call “smart contracts” (I prefer the term “consensus applications”) and the general term for these vehicle used to move these assets is the “token”. So I hope you can now see how the world of Bitcoins and tokens and Initial Coin Offerings (ICOs) and blockchains and digital identity all come together here.

So. If this is sensible way to implement money, as the Winklevii and others seems to think, who will manage the assets that are linked to these tokens? The first and most obvious possibility is commercial banks, as in the case of Gemini Coin. But there are others, as I set out in my most recent paper, and I’ll be exploring all of them in Zagreb. See you there.

Starbucks Stablecoins

I ignore almost all of the meaningless shilling masquerading as “news” that arrives via my cryptocurrency feeds, but a recent story about Bitcoin in the mass market caught my attention because it appeared to herald an unexpected and significant shift in the mass-market use of the digital gold. The announcement was that Starbucks is “working with Microsoft and a leading global exchange on a new digital platform that will allow consumers to use bitcoin and other cryptocurrencies at Starbucks”. Wow. That’s a pretty big deal. LiteCoin for latte would indeed be hugely significant. But…

That headline about Starbucks taking Bitcoin struck me as a little odd, since I distinctly remember that Howard Schultz, the executive chairman of Starbucks, said back in January that “I don’t believe that bitcoin is going to be a currency today or in the future”. Indeed when I looked at the actual story I realised that it was, as you probably suspected, not true. And, what’s more, just a couple of days later I read that “Starbucks has clarified that it will not be accepting Bitcoin (BTC) or other cryptocurrencies as payment”. As I suspected.

Reading further into the announcements we get down to the the brass tacks. Starbucks has no intention of accepting Bitcoin at retail point of sales (and nor, I imagine, does any other Main Street retailer). Starbucks said that they will play a “pivotal role” is developing applications “for consumers to convert their digital assets into US dollars”. Note the specifics: to convert cryptocurrencies into US dollars. What was actually being announced was, essentially, a plan to find a way of loading Starbucks wallets from Bitcoin accounts.

In other words, the conversion from Bitcoin into Starbucks private currency. Bitcoin to Starbucks Stablecoin, if you like, since Starbucks guarantees to redeem their private dollars at par with US dollars, so long as your redeeming them in order to buy coffee or a variety of other soft drinks, bottled waters and snacks.

Now, earlier in the year Jeremy Light, who knows what he is talking about, made the evolution of retailer wallets central to his predictions for change in the payment sector this year. He said that these wallets – for both online and in-store purchases, where I expect to see convergence – will spread “emulating the success of Starbucks and Walmart” by focusing on slick checkout. I think Jeremy is right about this and that’s what makes the Starbuck announcement mildly interesting, because a convenient mechanism to load retailer wallets from cryptocurrency accounts would actually make the use of them more attractive.

There is no point try to extend Bitcoin acceptance at point-of-sale. That’s not what is was designed for and it makes no sense from a strategic perspective for retailers to mess around with in-store systems, service and acceptance to accommodate Bitcoin, Ethereum, DogeCoin or anything else. However, having online mechanisms to load the retailer wallets is a different proposition, because the point-of-sale systems only need to be modified once (to accept the wallet) and the any number of back-end conversions can be explored without requiring further front-end modifications. That’s a win-win for the retailers and for the cryptocurrency users.

Twenty Years Ago!

………..the second Consult Hyperion seminar on……….

………….. D I G I T A L … M O N E Y …………….

The Tower Thistle Hotel London March 8-9th 1999

………………Confirmed Programme…………………

Day One: Economic & Business Issues

Chair Duncan Goldie-Scot Editor, Financial Times Virtual Finance Report

Keynote Address: European Multiple Currencies Sir Richard Body, M.P.

Digital Money is a Social Issue David Birch, Director, Consult Hyperion.

The European Digital Money Picture Dag Fjortoft, Deputy General Manager, Europay International.

Telecommunication Service Providers as Payment Operators Norman Bishop, Product Manager for Micropayments and E-Cash, BT.

Retailing and Digital Currencies Paul Arnold, Head of Tesco Direct.

The European Mass Market: Digital TV’s Requirements for Digital Money Richard Cass, Transactional Commerce Manager, British Interactive Broadcasting

Digital Money and Digital Phones: Europe’s Advantage Tim Baker, Wireless Marketing Comms. Manager, Gemplus

Transforming Businesses with Digital Money John Noakes, Business Manager for E-Commerce & Supply Chain, Microsoft UK.

Day Two: Regulatory & Technical Issues

Chair Ian Christie Deputy Director, DEMOS

A Legal Pespective on Digital Money in Europe Conor Ward, Partner in Computers, Communications & Media, Lovell White Durrant.

A View from the European Commission Philippe Lefebrve, Head of Sector in Financial Systems, European Commission DGIII.

The Technologies of Digital Money Marcus Hooper, Principal Payments Technologist, IBM United Kingdom.

Visa and Digital Money Jon Prideaux, Executive VP New Products (EU Region), Visa International.

Making Digital Money Work. Tim Jones, Managing Director of Retail Banking, National Westminster Bank plc.

Experiences from an Operational Micropayment Scheme Nigel Moloney, Senior Manager in Emerging Markets Group, Barclays Bank.

Mondex: A Status Report Victoria Mejevitch, Mondex Product Manager, Mondex International.

The Common Electronic Purse Specification (CEPS) Daniel Skala, Executive VP for Sales, Proton World International.

Bitcoin is going off the rails, but so what?

Number goes up, number goes down. Cryptocurrencies as a whole have been tumbling, and the original cryptocurrency, Bitcoin, is no different. It looks as if there was a bubble and it is bursting. The economist John Kay is unconvinced that this bubble will lead to anything. He wrote that “the underlying narrative of cryptocurrencies is, by the standards of historic bubbles, unusually weak; more akin to tulips than to ultimately transformational innovations such as railways or electricity” going on to observe that the “power of the current narrative is that it brings together so many features which make for an attractive and infectious story” which I think is congruent with some observers’ view of Bitcoin as a protest movement rather than a financial revolution.

I have a suspicion that John may be wrong though. I think Bitcoin will have an impact and that it will lead to the creation of new markets. His mention of the railways reminded me of Nouriel Roubini and Preston Byrne’s observation that that the cryptocurrency mania of today “is not unlike the railway mania at the dawn of the industrial revolution in the mid-19th century”. I’d put the dawn of the industrial revolution a little earlier than that, but The Black Swan and The Black Marmot are on to something here and to see why you need to know a little about that railway mania that they refer to.

Opening Liverpool and Manchester Railway.jpg
By A.B. Clayton, Public Domain.

I wrote about it some years ago for Financial World magazine (back December 2011 in fact) and made the point that Victorian Britain’s railway boom was truly colossal. The first railway service in the world started running between Liverpool and Manchester in 1830 and less than two decades later (by 1849), the London & North Western railway had become the Apple of its day, the biggest company in the world.

(See Christian Wolmar’s fabulous Fire and Steam for a beautifully written history of the railways.)

This boom led to a colossal crash in 1866. The crash was caused (here’s a surprise) by the banking sector, but in that case it was because they had been lending money to railways companies who couldn’t pay it back rather than American homeowners who couldn’t pay it back. Still, then as in our very own crash of 2007, the government had to respond. It did so by suspending the Bank Act of 1844 to allow banks to pay out in paper money rather than gold, which kept them going, but they were not too big to fail and the famous Overend & Gurney bank went under. When it suspended payments after a run on 10th May 1866 (as frequently noted, the last run on a British bank until the Northern Rock debacle), it not only ruined its own shareholders but caused the collapse of about 200 other companies (including other banks).

(The directors of Overend and Gurney were, incidentally, charged with fraud but got off as the judge said that they were merely idiots, not criminals.)

The railway companies were enormous and many ordinary people had invested in them. When their Directors went to see the Prime Minister in 1867 to ask for the nationalisation of the railway companies to stop them from collapsing (with dread consequences for the whole of the British economy and in particular the widows and orphans who had invested in them) because they couldn’t pay back their loans or attract new capital, they didn’t get the Gordon Brown surrounded by advisers who happened to be bankers tea and sympathy followed by the suspension of competition law. Benjamin Disraeli told them to get stuffed: he didn’t see why the public should bail out badly run businesses, no matter how big they might be.

The Mallard, holder of the world speed record for steam locomotives, 126mph.

Needless to say, the economy didn’t collapse. As you may have noticed, we still have trains and tracks. A new railway industry was born from the ruins, just as new cryptomarkets will arise from the ruins of Bitcoin. The transport services kept running because the new industrial economy needed them and that economy kept on growing. The new post-industrial economy needs a new transport network, for bits rather than iron and coal, and Bitcoin’s heirs and descendants might well provide it. The impact of the railway crash was not restricted to rail transport and the industries that used it, just as the impact of the Bitcoin crash will spread far beyond online drug dealing and mad speculation.

As I noted in my book “Before Babylon, Beyond Bitcoin”, Andrew Odlyzko’s superb paper “The collapse of railway mania, the development of capital markets, and Robert Lucas Nash, a forgotten pioneer of financial analysis” argues convincingly that the introduction of basic corporate accounting standards following the collapse of the railway companies was a significant benefit to Britain and aided the development of Victorian capitalism. You can’t make an omlette, as the saying goes, without letting the bad eggs go to the wall. Hence, as I summarised more recently, the vital lesson of that crash is that letting the railways collapse not only led to a stronger railway industry but it also helped other industries as well, because it meant that new standards for accounting and reporting were put into place.

This is hardly a novel observation. History has repeatedly gone through this cyclic co-evolution of technology, business and regulation to end with something pervasive and fundamental to the way that society operates, which is why I think Nouriel and Preston are right to use the comparison. Benoît Cœuré, chair of the Committee on Payments and Market Infrastructures (BIS), and Jacqueline Loh, chair of the Markets Committee (BIS) made a very good point about this in the FT writing that “while bitcoin and its cousins are something of a mirage, they might be an early sign of change, just as Palm Pilots paved the way for today’s smartphones”.

This, I think, is the narrative that I find most plausible. But what are cryptocurrencies “paving the way” for? I think it is for cyryptomarkets that trade in cryptoassets: cryptocurrencies with an institutional link to real-world assets. These are markets made up from money-like digital bearer instruments or, for want of a better word, “tokens”. As I have written before, it is not the underlying cryptocurrencies that will be the money of the future but the “tokens” that they support. Assuming that the fallout from the Bitcoin bubble is better regulation of the platforms, then cryptomarkets based on tokens will aid the evolution of post-modern capitalism as much as the invention of auditing helped Victorian entrepreneurs a century and half ago.

The Man Who Tokenised The World

David Bowie was a genius. That is a word that gets bandied around all too lightly these days, but in his case it is entirely justified. And not because of his music, as brilliant as it is. No. Bowie was a genius because he understood the future. When looking at how the internet was developing, he famously predicted the end game: streaming. Indeed, he said at the time that music would become “like water” piped into our homes.

(And his music was indeed brilliant: Aladdin Sane was the first album I ever bought with my own hard-earned cash, Ziggy Stardust was part of the soundtrack to my college years and “Heroes” is one of my all time favourite songs.)

Not only did Bowie predict the future, he monetised it. In what I am convinced that future economic historians will surely highlight as one of the weak signals for change to a post-industrial economy, he created the Bowie Bond. This was a 10 year, 7.9% self-liquidating bond backed by the revenues from all of his music prior to 1993. The value of this over a decade was estimated at $100 million and stamped as AAA by credit rating agencies. Then, in 1997, these bonds were sold to Wall Street. Whether Bowie knew that this valuation was nonsense or not I couldn’t say, but he made $55 million from the bond sale. A few years later, the bonds were trading as junk. Bowie, as it turned out, was smarter than the bond market.

Ten years ago I wrote about the Bowie Bonds when I was thinking a lot about private currencies and digital money. It had occurred to me that those $1,000 Bowie Bonds were a shade away from being a form of Bowie Bucks and that if they had been issued as some kind of digital bearer instrument (DBI, or what many people now call “tokens”) then would have been a form of repetitional currency. I said that while it might seem strange to imagine trading in Bowie Dollars that are simply units of Bowie bonds, why not? As I noted at the time, it would be no different to trading with Edward de Bono’s “IBM Dollar” (in that it’s a claim on some future asset) or a similar instruments.

At the time, of course, I did not know that the shared ledger revolution was around the corner, so I imagined that Bowie Bucks would be implemented either in decentralised hardware (a la Mondex) or centralised software (a la Digicash). Now we have another and more appealing alternative to deliver the currencies of the future: tokens trading on shared ledgers. If Bowie were here today, I’m sure he would be discussing a token sale rather than a bond sale. But on what platform? Do the permissionless public ledgers work as a platform? Or do we need institutions to create permissioned ledgers with service-level agreements? How exactly will the money of the future work?

Digital and Crypto Layers 

I’ll be talking about this world of cryptomarkets, cryptoassets and cryptocurrencies at the 3rd Nordic Blockchain Summit at Copenhagen Business School on Friday, so I look forward to seeing you all there. I’m genuinely keen to learn more in this space interested your spectrum of view on tokenisation and such like. Don’t be shy with the question.

Oh no, not “legal tender” again

Oh well. Just had another pointless argument about cryptocurrency and legal tender with someone in another context. The argument was pointless for a couple of reasons…

First of all, the argument was stupid because the person I was arguing with didn’t know what “legal tender” means anyway and, as I’ve already pointed out, it doesn’t mean what a lot of people think it means. Let’s just have a quick legal tender recap, using the United States as the case study. Section 31 U.S.C. 5103 “Legal tender” states that “United States coins and currency [including Federal reserve notes and circulating notes of Federal reserve banks and national banks] are legal tender for all debts, public charges, taxes, and dues”. Here is chapter and verse from The Man commenting on what that means: “This statute means that all United States money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise”.

TL:DR; The Man says no-one can force you to take dollar, dollar bills. 

Secondly, the argument was stupid because the person I was arguing with hadn’t bothered to fact-check the story that they were arguing with me about in the first place. It was to do with this story, supposedly noting Bitcoin’s status in Japan saying that “in Japan bitcoin core (BTC) is ruled legal tender and is already used to buy everything from airline tickets to sushi”. This is, as you may suspect, is completely false because in Japan the Virtual Currency Act defines Bitcoin (and other virtual currencies) as a form of payment method and not as any kind of legally-recognized currency or legal tender.

TL:DR; Bitcoin is not legal tender in Japan, nor anywhere else for that matter.

Nor, I strongly suspect, will it ever be. So let’s put that to bed and ask the more interesting question as to whether a central bank digital currency (e$, for short) would be legal tender. Here, I think the answer is unequivocal: yes, and in unlimited amounts, because there is no credit risk attached. A transfer of e$ is full and final settlement in central bank money and in time Section 31 U.S.C. 5013 will undoubtedly be extended to say so.