CBDC is a black and white issue

I was reading J.P. Koning’s excellent paper [PDF] on Central Bank Digital Currency (CDBC) for Brazil and came across his reference in passing to Narayana Kocherlakota, former CEO of the Federal Reserve Bank of Minneapolis, who wrote (in 2016) that economists do not know very much about the topic of anonymity and “calls for the profession to model it more systematically”. I think this is a really critical point, because the decision about where to set the anonymity dial for a cash replacement product is an important one, and not one that should be left to technologists.

This decision is discussed in the context of implementing a digital fiat currency of one form or another. The paper explores three ways to implement a CBDC for Brazil.

  1. MoedaElectronico (Electronic Cash): this is the most cash-like of the three CBDCs. It pays neither positive interest nor docks negative interest and is anonymous. Like cash, it is a bearer token.

  2. ContaBCB (BCBAccounts): this is the most account-based of the three templates. Ac- counts are non-anonymous and pay interest, like a normal bank account.

  3. MoedaHíbrida (Hybridcoins): provides a mix of cash and account-like features, including the ability to pay a varying positive and negative interest rate, while offering users the choice between anonymity or not. 

Now, the first two are well-known and well-understood. I wrote about them again last month (I’ve discussed “BritCoin” and “BritPESA” several times before), in a comment on Christine Lagarde’s speech [15Mb: Central banks, tokens and privacy] and I don’t propose to look at them further here. It’s that last example that interests me.

Let’s go back to that point about anonymity. In the paper J.P. says that the case can also be made for a permanently negative interest rate on anonymous CBDC. Why? Well, since we all understand that criminality and tax evasion impose costs on society, it may be worthwhile to design anonymous payments systems in a way that recoups some of the costs these activities impose.

In other words, construct a cash replacement in which anonymous transactions cost more than non-anonymous transactions. One way to do this, which is referenced by J.P. in his paper, was the “Crime Pays System” or CPS as conceived by the artist Austin Houldsworth. Austin is most well-known for designing the cover of my book “Before Babylon, Beyond Bitcoin” of course, but he also ran the Future of Money Design Award for Consult Hyperion’s annual Tomorrow’s Transactions Forum for many years. Oh, and he was awarded a Ph.D by the Royal College of Art (RCA). It was his idea to have me present CPS at the British Computer Society (BCS). We had my alter ego set out the new payment system to an unsuspecting audience who, I have to say, were excellent sports about the whole thing! It turned out to be an entertaining and enlightening experience (you can read more and see the video here).

Cps bcs

In CPS, digital payments would be either “light” or “dark”. The default transaction type would be light and free to the end users. All transaction histories would be uploaded to a public space (we were, of course, thinking about the Bitcoin blockchain here) which would allow anybody anywhere to view the transaction details. The alternative transaction type would be dark. With this option advanced cryptographic techniques would make the payment completely invisible with a small levy in the region of 10% to 20% would be paid per transaction.

The system would therefore offer privacy for your finances at a reasonable price. The revenue generated from the use of this system would be taken by the government to substitute for the loss of taxes in the dark economy.

What a cool idea.

Now, at the time it was just a concept. We didn’t spend much time thinking about how it would actually work (I was basing the pretend implementation for the BCS presentation on Chaumian blinding a la Digicash, hence this gratuitous picture of me influencing David in Vegas.)

David Chaum las vegas 2018

That was then. In the meantime, however, along came ZCash and the mechanism of shielded and unshielded transactions that J.P. has used as the basis for MoedaHíbrida’s two different modes. If the user decides to hold shielded (ie, dark) MoedaHíbrida tokens, then all transactions made with those tokens are completely anonymous and untrackable. The user can decide to unshield his or her MoedaHíbrida tokens so that all transactions can be seen (ie, light).

Offering users the choice of anonymity but making them pay for is a radical solution but I’m with J.P. in thinking that it deserves attention. What I think is very clever about using negative interest rates (which had never occurred to me) is that it allows for anonymous transactions without imposing a transaction friction, thus providing the cash substitute in the marketplace, but it penalises the stashing of anonymous cash. The negative interest rate means that dark tokens will be subject to a negative interest rate of, say -5% per annum, while light tokens will receive a competitive SELIC-linked interest rate.

Whether or not this is the way forward I or not, it is a line of thought that deserves serious examination in the context of CBDC design. If it is considered important to society to provide anonymous means of exchange, then the “tax” on the anonymous store of value seems a reasonable way to distribute the costs and benefits for society as whole.

We need to go cashless, not drift into cashlessness

Having just been to China for Money2020 and having experienced at first hand the operation of a cashless society, I’ve even thinking (again) about the design of cash-replacement payment systems for a range of perspectives, using China as a case study. The first point to make is that people in China are well aware of what happens to when society switches from anonymous cash to not-anonymous (I can’t think of a suitable antonym) electronic payments. As observed in the Financial Times, “that scale of data accumulation is beyond our imagination”. The Chinese woman making this comment (while observing that despite her concerns about privacy, mobile payments are too convenient to opt out of) goes on to say (somewhat poetically, in my opinion) that she cannot tell whether her compatriots are “constructing a futurist society or a cage for ourselves”

Not everyone in China is part of this revolution, of course. The World Bank Global Findex database, which measures financial inclusion, estimates that as of lat year some some 200 million Chinese rural citizens remain unbanked, or outside of the formal financial system. As in Sweden, the shift toward cashless is raising issues around exclusion and marginalisation.

There are, for example, supermarkets with different lanes for cash or cashless payments that act as physical manifestation of social stratification between, as Foreign Policy notes, the young and the old and between the urban middle class and those left behind (between, as David Goodhart would put it, the “anywhere” and the “somewheres”). I’ve written before that we will see the same in the UK as cash vanishes from middle class life to become the preserve of the rich and the poor who will use it for tax evasion and budgeting respectively. A “Which” survey found that over 75% of low-income households rely on cash, as well as over 80% of elderly households. The shift to cashless society must be planned to help these groups so that they share in the benefits of cashlessness.

Woking going cashless

Cash is vanishing even in Woking.

I think we should start to plan for this now. In China, as in Sweden (where the New York Times observes that “cash is disappearing in the country faster than anyone thought it would“), we are beginning to see what happens to societies that slide into cashlessness. I am against this. That is, I am in favour of cashlessness, but I am in favour of it as a policy decision by society that is implemented to meet society’s goals. I couldn’t disagree more with the Wall Street Journal’s view that the move to cashless society “should be left to technological advancement”. No, it should not. This is a matter of great importance and with significant implications for society. The strategy should therefore be set by society, not by technologists.

Now, clearly, technological advances deliver new possibilities to policymakers and it is good for technologists to explore these possibilities. But, as they say, just because something can be done does not mean it should be done. We need a proper debate and a regulatory envelope set out to move forward. I wonder if we might seize the opportunity and set down a technological marker for post-Brexit Britain by declaring that cash will be irrelevant in the UK in a a decade. That is, anyone who needs to pay for anything will be able to do so electronically and that anyone who does not want to pay electronically will be presented with a method for paying in cash, albeit one that they have to pay for like (like cheques).

This must mean that in parallel we must set a national goal to provide a free at the point of use electronic payments infrastructure for everyone. Otherwise we’ll end up where they are in America, where jurisdictions are trying to ban cashlessness (and thus keep the cost of the payment system high, especially for the poor) in the name of social justice. In New York, Congressman Ritchie Torres has put forward proposals to force businesses to accept cash and called them a a “new frontier” of anti-discrimination law that is needed to prevent a “gentrification of the marketplace”. Similarly, as the Washington Post reports, lawmakers in the nation’s capital have introduced a similar bill. A council member there said that by refusing cash businesses are “effectively telling lower-income and younger patrons that they are not welcome”. Maybe, but if so it’s only because those demographics don’t spend enough to provide the margin needed to cover the cost of cash.

It’s time to start thinking about what the requirements for that infrastructure are and consulting consumer organisations, businesses and government departments on their needs. We need to make a cashless Britain, not simply allow a cashless Britain.

Davo Polo

I set off for Hangzhou  and Money2020 China as a modern-day Marco Polo, intent on coming back home to regale the subjects of Her Majesty with fanciful tales of a far-away place where people use their mobile phones to pay for things and nobody uses paper money any more, much as Marco Polo himself would have regaled the inhabitants of Venice with his tales of (as it happens, the same) far-away place where people used paper money to pay for things and nobody used copper bars, cowrie shells or coins any more.

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Hanging with Tracey Davies, the President of Money2020.

My travels were a lot easier than Marco’s because for one thing I was able to fly directly to Shanghai whereas it took him years to get there and for another thing because everyone (and I mean everyone) has a smartphone, and their smartphones all have translation applications that convert spoken English to written Chinese and spoken Chinese to written English. My first experience of this was at Shanghai airport when the driver meeting me spoke into his phone and then presented me with a screen saying “do you know this person?” and holding up a sign with “Chris Skinner” on it. Naturally, I took the phone and said into the microphone “no, I’ve never heard of him and I’ve never read any of his books either” but it was too late as the driver had just seen him in arrivals.

Money2020 China 18 - 3 of 28

 

Flying the flag for Brexit Britain

My first step on the road to amazing my peers back home was to get a working AliPay or WeChat account. I’d forgotten my AliPay password so I decided to sign up for a new account. Unfortunately you can’t get an AliPay account with a UK phone number. An American phone number, yes. An Australian phone number, no problem. A Burkina Faso phone number, Bob’s your uncle.

Money2020 China 18 - 2 of 28

 

Alipay options

As it seemed like a UK phone number was beyond the pale, I decided to get WeChat instead. I activated my WeChat money function by linking my account to a couple of my credit cards.

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Activiating WeChat Money

None of my cards worked in this context, but it didn’t matter because once the money function is activated you can just give people cash and ask them to send the same amount via WeChat, thus topping up via a system of human Qiwi terminals. One of the women that kindly agreed to do this for me, on being handed a couple of RMB 100 notes, told me that it was the first time she’d touched paper money for at least a year.

Money2020 China 18 - 5 of 28

Woot! You can pay me using WeChat right now if you want to.

(China was the first in to printed means of exchange and they are close to being first out, close to being the first nation-state where notes and coins are economically irrelevant and post-functional cash will be the only kind most people ever possess. It looks as if China’s 800 year experiment with paper money will soon be over.)

Actually, it turns out that my stories of mobile phone payments are almost completely uninteresting – I wish you’d told me before, frankly – because everyone has now heard about WeChat and AliPay, everyone understands the transformational nature of their payments platforms and everyone has seen the ubiquity of QR  codes. The one time we tried to use NFC, ApplePay and that totem of Western Civilisation, the iPhone (which is, of course, made in China) to pay for something, it didn’t work. App and pay, frankly, is beating tap and pay.

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A payment expert witnesses the failure of tap-and-pay

(China was early into NFC, with China Mobile doing plenty of experiments in the field. Further back, Hong Kong was the birthplace of the contactless mass transit card, the Octopus scheme. I note that the Hong Kong MTA has just awarded a contract for QR code ticketing. It looks as if China’s 25 year experiment with contactless will soon be over.)

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Ron Kalifa talking about value-added merchant services

As for the conference itself, I particularly enjoyed Worldpay vice-chairman Ron Kalifa’s fireside chat. He said that in general people were underestimating the impact of open banking and I am certain that he is right. He also presented Worldpay’s annual report on payment trends worldwide, which was very interesting as you might expect.

One of the factors central to the evolution of payments is security and so I always enjoy presentations around fraud. In China, these have scary large numbers attached to them, but you have to take into account the size of the Chinese economy. According to the back of my envelope, Chinese cybercrime losses are lower than in many other countries.

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Real, and scary, fraud numbers

Given the widespread use of scores of one form or another to determine trustworthiness it is no coincidence that China sees a rise in frauds relating to the manipulation of these scores. Without commenting on the benefits or otherwise of such models (most Brits, myself included, can only think of Black Mirror when social scores are discussed) it is worth making the point that preventing “gaming” of these scores while preserving individual privacy means dealing with paradoxes that might well be resolved through the use of cryptographic techniques that have no conventional analogues and are therefore difficult for policymakers to bear in mind.

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Reputation fraud in action

Most of what I found thought-provoking, both in the presentations and the water cooler discussions, was to do with business models rather than new technologies. The new technology that fascinated me most was the toilet in my hotel room. The lid opens automatically when you walk into the smallest room and once you have settled onto the warmed and padded seat you are faced with a control panel (shown below) that gives access to a variety of functions, all of them wonderful. Next time someone tells you that a cashless economy is as likely as a paperless bathroom, tell them that I’ve experienced both, and they are both awesome.

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Toilet 2.0

The new business models emerging in a regulated, platform-centric, dynamic market are what we should be studying. We might choose to implement some of these models in a slightly different way taking into account the varying cultural norms around security and privacy, but the idea of separating payments from banking and then turning payments into platforms, and then using these platforms to acquire customers at scale for other businesses is certainly very interesting.

Money2020 China 18 - 18 of 28  

This is what a smartphone-centric platform looks like

These new models, of course, centre on data and value-adding using that data. When people pay for everything with their mobile phone, they lay down a seam of data that is waiting to be mined. Despite this, the convenience of the mobile-centre platforms is so great that people are clearly willing to put privacy concerns to one side. I chaired a great session on privacy with CashShield, Symphony and eCreditPal with, I think, gave out a very comforting message: if you build services with privacy in the first place, then actually complying with GDPR and other global regulations is actually not that much of a problem.

Money2020 China 18 - 25 of 28

 

One more thing that struck me about the context for these developments that it seems to me that China is making its e-money regulation more like the EU’s. With an EU electronic money licence, the organisations holding the funds must keep them in Tier 1 capital and are not allowed to gamble the customer’s money, whereas in China there was no such restriction. Now the People’s Bank has said that from January 2019 the Chinese operators will have to hold a 100% reserve in non-interest bearing deposits at a commercial banks, a decision that will likely cost the main players (Tencent and Alipay) a billion dollars or so in revenue.

Anyway, a big thank you to the Money2020 for giving me the opportunity to take part in this event! It was lovely to meet so many new people and see so many new perspectives, even if I did have to spend some of the time in a jazz bar.

Money2020 China 18 - 21 of 28

 

All in all, I wouldn’t change my job for all the tea in China, much of which you can see in this picture of the plantations outside Hangzhou.

Money2020 China 18 - 28 of 28

Looking forward to next year already.

“Do you want a shot of novocain? / No, I want a shot of you getting a diploma.”

There’s been yet another story about fake medical qualifications in the news. A woman from New Zealand spent a couple of decades working as a consultant psychiatrist in our National Health Service (NHS) before it was discovered that she had made up her medical degree and forged a bogus letter of recommendation from Pakistan. The deception only came to light after she had been convicted of trying to defraud an elderly patient.

Now, I rather imagine that if I were a hospital or a medical centre or a GP practice employing a new doctor, I might be tempted to at least look them up on LinkedIn or something before I let them get their hands on a patient but I suppose that under the NHS it’s considered ungentlemanly or discriminatory or just plain rude to ask a prospective clinical employee for verifiable evidence of any valid qualifications. We are English, so we take people at their word. Unfortunately, dictum meum pactum. May not survive the 

While fake doctors seem to be something of an issue, as I have written before, I am English and therefore far more concerned about the epidemic of deceptive dentists across our green and pleasant land.

When I read that a “bogus dentist with no qualifications managed to fool her employers at NHS hospitals for nine years before being discovered” it makes me shiver.

When I see a woman convicted at Birmingham Magistrates’ Court on two charges of carrying out dentistry work without holding any dentistry qualifications, I get twitchy.

When I find out that Manchester Magistrates Court convicted a man who had no dentist qualifications, used a false name and was fraudulently using the registration number of a genuine dentist, I begin to think about leaving the country for good.

When I discover that a bogus dentist (an asylum seeker who told immigration officers he had a dental practice in Iran) took a dead dentist’s identity, drilled without a local anaesthetic and did expensive fillings that crumbled within days, I have trouble sleeping.

(Which again reminds me of the late lamented Robert Schimmel’s joke about visiting the dentist: “Do you want a shot of novocain? / No, I want a shot of you getting a diploma.”)

How can this happen, you might wonder, in a world where the blockchain exists? As Don and Alex Tapscott remind us in “Blockchain Revolution”, the “blockchain can hold any legal document, from deeds and marriage licenses to educational degrees and birth certificates”. And indeed managing educational qualifications seems to be one of those things I hear about at conferences where the magical properties of the blockchain are going to transform the sector and bring about a new era of peace and prosperity.

But how?

Suppose there was some global educational qualifications blockchain. That wouldn’t by itself fix anything as far as I can see. How exactly would the blockchain stop fake dentists from fixing my teeth with superglue and polyfilla?

I happened to look at a couple of projects in this space earlier in the year, and I can tell you that much of the wishful thinking projected onto the blockchain is really nothing about consensus or immutability but, as in so many other cases, really all about interoperability. There is no global standard for education qualifications, there is no global trust framework for organisations able to create qualifications (and their regulators) and there is no global infrastructure for digital signatures in that framework.

Think about it. If you present me with a Ph.D in Quantum Philosophy from the University of Woking, I need to be able to establish a trust chain that tells that there is a WokingU, that WokingU was authorised to award Ph.Ds at the time that you’re Ph.D was awarded, that the Ph.D you are presenting is real and signed by WokingU and that you are indeed the subject of the Ph.D award.

All of these problems have to be solved before we get near to figuring out whether a global blockchain might or might not be a better place to store such qualifications that either a global database of qualifications or a scheme for federating qualification repositories.

Insurance and outsurance

A couple of years ago, the World Economic Forum (WEF) put out their report on “The Future of Financial Services” [PDF]. This report (for which I was subject matter expert, as it happens) said that while it is natural to focus on the imminent disruption of banking because of new technology, the biggest disruption caused by that new technology will be in insurance. For all of the talk of open banking and contactless payments, your life is not going to be fundamentally changed by having Goldman Sachs lend you money via your Amazon app. The advent of “insuretech”, on the other hand, will almost certainly mean that you will change your day-to-day life.

Here’s why. When you insure your teenager’s car you have the insurance company install a “black box” in the vehicle to encourage them to drive within appropriate parameters to the dual ends of keeping them alive and reducing the cost of their comprehensive cover. So why not do the same for people? After all, a third of US consumers have adopted wearable devices, such as smartwatches and fitness trackers, to help themselves to better health. In turn insurers (and employers) are of course looking at ways to benefit from the massive quantities of data that people are therefore generating about themselves, whether consciously or not.

This will completely change the relationship between insurers, health care and individuals. It’s in the life insurers’ interest to have you stay alive and paying premiums for as long as possible! It might seem odd that when you go to renew your health insurance you find the premium raised because you didn’t go to the gym enough, or went to the pub too much, but I’m sure we would soon get used to having the additional data and the feedback that goes with it. (Although it would spoil a great many detective shows, since the first thing the police will do after the jogger has discovered the body in the park will be to download the bio-telemetry data so that their companion coroner-bot can instantly tell them the time and cause of death.)

This isn’t some internet-of-things (IoT) future hype. John Hancock, one of the oldest and largest North American life insurers, has said that is going to stop selling traditional life insurance and instead sell only “interactive” policies that track fitness and health data through wearable devices and smartphones. Apparently, nearly half of its customers are already part of such as scheme and they check in with company a couple of times every day!

Such initiatives are certain to spread. Accenture says that three-quarters of US consumers are willing to share data from wearable devices with their insurance company, and with Apple launching their new watch with all sorts of health monitoring facilities built in to it, the normalisation of the personal black box is advancing to the point where I can easily forsee scenarios in which consumers will be required to have such devices into order to obtain insurance at all.

Now, this may all sound (as Vox rather memorably put it) like a cross between Nectar points and the Hunger Games, but there is no getting away from it. Big data is all around us and its most voracious consumer, machine learning, is preparing the ground for artificial intelligence (AI) to step in and manufacture wisdom from that raw material. In many industries this may well lead to great efficiencies and amazing new products. Your insurer could, potentially, know everything about you. And I mean everything. From your data exhaust they will know where you are and what you are doing. Never mind counting your steps, they will know whether you are walking or riding the bus, sleeping or having sex.

All good stuff. There is, however, an elephant in the room. Society is going to have to decide the regulatory envelope for insurers’ strategies. Do we want a society where individuals are given affordable access? Will we allow people to be divided into insurable and uninsurable groups? Given the knowledge generated by the additional data at their disposal, which will serve to reduce the number of “average” risks (as shown in the picture), what will we do about the growing numbers for whom insurance will become an unaffordable luxury? While it seems reasonable to give you a better deal on life insurance if you are going to live longer, it seems unreasonable that you are not going to be able to afford health insurance if your genes indicate a tendency to expensive illnesses! We might all think it’s a bit rich to have the NHS pick up the tab because you are stuffing your face when you might otherwise eat sensibly, but what if it turns out that your genes have given you no option?

As it happens, my good friends at the Centre for the Study of Financial Innovation CSFI) are hosting a (free!) lunchtime roundtable on InsureTech on 6th December 2018 in London. I’ll be on a panel there as the Technology Fellow at the CSFI, along with my no.1 RegTech go-to person Jo Ann Barefoot, Matt Cullen of the Association of British Insurers (ABI) and an informed audience that may well include you if you get over to the CSFI and register a place now. See you there.

Central banks, tokens and privacy

Christine Lagarde, the Managing Director of the International Monetary Fund (IMF) and therefore to a first approximation the person in charge of money, gave a speech in Singapore on 14th November 2018 in which she asked…

Should central banks issue a new digital form of money? A state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments?

This is a question that, of course, interests me greatly. The IMF Staff Discussion Note (18/08) on which her speech is based sets out these two options clearly:

  1. Token-based CBDC—with payments that involve the transfer of an object (namely, a digital token)—could extend some of the attributes of cash to the digital world. CBDC could provide varying degrees of anonymity and immediate settlement. It could thus curtail the development of private forms of anonymous payment but could increase risks to financial integrity. Design features such as size limits on payments in, and holdings of, CBDC would reduce but not eliminate these concerns.

  2. Account-based CBDC—with payments through the transfer of claims recorded on an account— could increase risks to financial intermediation. It would raise funding costs for deposit-taking institutions and facilitate bank runs during periods of distress. Again, careful design and accompanying policies should reduce, but not eliminate, these risks. 

 Or, as I said a few years ago, should the Bank of England create BritCoin or BritPESA?

I’ve written before about the advantages and disadvantages of moving to digital currencies and don’t want to go over these arguments again here. Ms. Lagarde has also spoken about them before, specifically noting that digital currencies “could be issued one-for-one for dollars, or a stable basket of currencies”. Why her new speech was reported in some outlets as being somewhat supportive of cryptocurrencies is puzzling, especially since in this speech she specifically said she remained unconvinced about the “trust = technology” (“code is law”) view of cryptocurrencies. But the key point of her speech is that the IMF is taking digital currency seriously and treating it as something that might actually happen.

(Note that the IMF position seems different to the position of European Central Bank, where President Mario Draghi recently said that they have “no plan to issue a digital currency because the underlying technology is still fragile and the use of physical cash still high in the euro zone”.)

The reason for this comment on her speech is to re-iterate my view on the BritCoin approach. I think Ms. Lagarde is right to mention a state-backed token as an option. The idea of using token technology to implement cryptoassets of any kind, which I have labelled digital bearer instruments, is feasible and deserves detailed exploration. What we might call “digital fiat”* is simply a particular kind of cryptoasset, as shown in the diagram below, a particular kind that happens to be create digital money based on an institutional binding (where the institution is central bank) to national currency.

Cryptomarket Model

 

Now, nothing in this formulation makes the use of cryptoassets (rather than a central database) inevitable. There are, however, other arguments in favour of using there newer and potentially more radical technologies to implement digital money. One of them is privacy.

(As The Economist noted on this topic, 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”.)

In her speech, Ms. Lagarde said that…

Central banks might design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law.

As a fan of practical pseudonymity as a means to raise the bar on both privacy and security, I am very much in favour of exploring this line of thinking. Technology gives us ways to deliver appropriate levels of privacy into this kind of transactional system and to do it securely and efficiently within a democratic framework. In particular, new cryptographic technology gives us the apparently paradoxical ability to keep private data on a public leader, which I think will form the basis on new financial institutions (the “glass bank” that I am fond of using as the key image) that work in new kinds of markets.

* I happened to sit in on the panel discussion on digital fiat at Money2020 China. The discussion was chaired by Carolyn MacMahon from the San Francisco-based Digital Fiat Institute, which I must confess I’d not heard of until today, but intend to visit next time I’m over on the West Coast. In the Q&A I was going to ask about the anonymity issue but go sidetracked with the impact on commercial banks. Next time. 

Mobile money and the race to cashlesness

The wonderful people of the Economic Club of Minnesota (ECOM) invited me to Minneapolis to give a talk at their October luncheon. I was talking, generally speaking, about my “5Cs”: the potential issuers of future digital currencies. If you click on this picture, it will take you to a video of the talk and the Q&A session afterwards. One of the points I made in the talk was the payments in the future are about my mobile phone talking to your mobile phone, not me handing something (banknotes, credit cards, cheques, whatever) to you. This means that the adoption of new forms of money can accelerate without updating or replacing cash registers or plastic cards.

The mobile phone is taking us into a cashless future.

Birch Talking

The Club had arranged for a driver to pick me up from the airport and take me to the hotel. He was very interesting man of Somali origin and we had a nice chat in the car. By the time we got to the Hilton, I thought I ought to call my hosts and ask them to have him onstage instead of me!

Why? 

Well, he told me about his last visit to the old country, when he was surprised to find himself paying for everything (and he meant everything, from a nickel payment in the food market to a $400 remittance to relatives) using a mobile phone.

“It works on trust”, he told me, “because there is no government”.

(I was thinking of telling him that in my opinion the reason it works at all is because there is no government, because in places where the government has done its best to regulate mobile payments, such as India and Nigeria, mobile payments do not have anything like the penetration that they do in Somalia.)

Mobile payments are spreading. New interfaces (voice), new security (face), new authentication techniques (continuous passive authentication) and evolving network coverage mean that mobile phones are simpler and more secure than cash for a great many people around the globe. But which country will win the race to cashlessness? 

Well, that’s where my driver comes into it. My reasoning as to why he might have been a good choice for a speaker, apart from the fact he was smart and loquacious, is that it is his motherland, rather than the UK (or Sweden, or even the USA, where the Federal Reserve tell us there are now more $100 bills in circulation then there are $1 bills) that may well become the world’s first cashless country. A recent World Bank report showed that Somalia has one of the most active mobile money markets in the world, outpacing most other countries in Africa. It’s even superseded the use of cash (their words, not mine) in the country. Let me repeat that for emphasis. The World Bank say that in Somalia, cash has been “superseded”. It is approaching irrelevance (apart form anything else, no-one uses it there because of widespread counterfeiting) as Somalia heads toward cashlessness.

(As I said in my book, a cashless country does not literally mean a country where cash is extinct. Some cash will linger for post-functional purposes, such as pinning to wedding dresses or waving around in casinos, but that cash will be irrelevant to GDP.)

Interestingly, within Somalia there is already an almost cashless enclave where “payments through mobile she says have rocketed from 5% two years ago to more than 40% now”. That enclave is Somaliland (the breakaway republic of 3.5m people within Somalia), and it may well be Somaliland, rather than powered-by-Swish Sweden, as the place where cash will first vanish into memory. And if your memory is good, you may recall that I wrote about it six years ago, when I said that “Somaliland might well become the world’s first cashless country. Not Iceland or the Netherlands, Korea or Kenya, but Somaliland”.

It hardly difficult to predict that cashlessness would come to Africa first, because as I have often said at conferences, in seminars and when interviewed, it is the mobile phone (not the payment card) that is the nail in cash’s coffin, because a mobile phone is a means to get paid as well as a means to pay. It’s both a “card” and “a terminal” in the world of Visa and PayPal, Faster Payments and Venmo. The spread of mobile payments, rather than the spread of plastic cards, will see cash become irrelevant to law-abiding people in a great many countries. And that cashless world is almost here. As everyone observes, if you go to China or Kenya, you’ll see people paying with phones for everything. In fact when I was in China last, I was in a near-permanent state of shock watching people for everything, everywhere with ubiquitous bar codes. (And almost all of those payments went through third-party providers (WeChat and AliPay) rather than through bank services.)

While in urban China, cash is becoming obsolete, it is still widely used outside the cities, which is why I still think that Somaliland might win the race though, just as I said all those years ago. Don’t listen to me about it, listen to what Mr. Rashid, a tea seller there, has to say about it: “I never see cash”. And his teas sell for 2,000 Somaliland Shillings each. Which is about 25 cents. A quarter. And his customers use phones to pay.

The world of mobile payments has fascinated me from its earliest days and I’ve been able to observe its evolution first hand. My colleagues at Consult Hyperion worked on the UK’s first prepaid scheme, first WAP “walled garden”, the first NFC trials and, I’m proud to say, M-PESA in Kenya. Experience has given a pretty realistic picture of what is happening across the payments industry in general and mobile payments in particular, and my view is that we are heading toward a tipping point that will see us accelerating toward cashlessness.

 

 

xxx

Something funny is going on with our great British cash

In our United Kingdom, the value of currency in circulation has dropped, year on year, for seven consecutive months (see chart), for the first time since records began in the 1960s. This is something of a surprise. For many, many years the use of cash for purposes such as shopping has been steadily decreasing while the amount of cash “in circulation” has been steadily increasing. Broadly speaking, the use of cash for legitimate activities has been falling while the use of cash for drug dealing, money laundering, tax evasion, payments to corrupt officials and so on has been rising. Hence my surprise at this shift in the statistics.

Of that cash that is “in circulation”, the £16.5 billion in £50 notes is particularly puzzling. Earlier this year the Treasury said that £50 notes were “rarely used” for routine transactions and that “there is also a perception among some that £50 notes are used for money laundering, hidden economy activity, and tax evasion”. I’ll say. This perception is widespread, by the way. A couple of years ago Peter Sands, the former head of Standard Chartered, said that the main use of the £50 was illicit and he’s a banker not a mere blogger such as myself.

Given this perception, I would have thought that is was time for the Treasury to tell the Bank of England to stop making life easy for criminals and withdraw the £50 over a two year period. But apparently not. Given that no-one is using them for legitimate purposes, the Bank of England has decided that now is a good time to bring the £50 up to date and make it out of plastic. Robert Jenrick, exchequer secretary to the Treasury, explained the decision by saying that “people should have as much choice as possible when it comes to their money and we’re making sure that cash is here to stay” although I don’t think anyone in the Treasury or anywhere else was asking for cash to be removed from circulation, only for a narrowing of the spectrum (dumping 1p and 2p coins, two-thirds of which are only used once, and removing £50 notes leaving the £20 as the highest denomination).

Oh well. I suppose tax evaders are more of an electoral force than I thought. According to the HMRC’s latest estimates that are shown the chart below (for 2016/2017), almost half of the tax gap is down to small businesses and they account for nearly three times as much of the missing tax as “criminals”. I’m not sure if these groups are natural Conservative voters, but they must in some measure account for the governments reluctance to inconvenience those responsible for the lion’s share of missing taxes.

UK Tax Gap Customers 2017 Picture

 

As an aside, the Bank says that it wants a scientist to be the face of the new notes and (god help us) says it will ask the public who it should be. But why a scientist? That doesn’t seem appropriate to me. Surely a much better choice would be the late and much lamented national treasure Sir Kenneth Dodd of Knotty Ash who, rather famously, kept enormous piles of cash in his attic because he didn’t trust banks. Or perhaps one of our greatest jockeys, Lester Piggott, who was once sent down for three years for tax evasion. I think the Bank should be told: the medium is the message.

Why do I keep going on about this? It’s because the people who benefit from the convenience of £50 notes (eg, builders avoiding VAT) are doing so at the expense of law-abiding tax-paying citizens (eg, me) and I have to fill in my tax form soon.

Gold cards vs. gold cards

According to a reputable news source (well, the Daily Mail) the Royal Mint is casting (sic) around to find things to do when the Treasury caves to the inevitable and tells them to quit wasting everyone’s time and money by minting coins. They’ve come up with the idea of making a credit card out of real gold. They are apparently working on ways to get 18-carat gold cards to work in ATMs and, of course, at contactless terminals.

The cards will have the owners signature engraved on the back (I’ve no idea why, since the card schemes are discontinuing the use of the pointless signature panels on cards) and will apparently be worth $3,000 each which (as a number of Twitterwags immediately pointed out) will greatly increase the number of fake ATMs in the streets around Belgravia after midnight.

This isn’t the Royal Mint’s idea, of course. They stole it wholesale from 30 Rock a few years ago.

There’s another kind of gold card that is worth considering: not one that is made of gold, but one that is backed by gold. I wrote about this idea more than a decade ago, using the example of an Islamic electronic gold card, saying…

“Given the desire to transact with the convenience of a card but in a non-interest bearing currency, it would seem to be a straightforward proposition to offer a gold card that is actually denominated in gold. An Islamic person tenders their chip & PIN gold card in Oxford Street to buy a pair of shoes: to the system it’s just another foreign currency transaction that is translated into grams of gold on the statement. If, at the end of the month, the person has used more gold than they have in their account then they can use some of the bank’s gold for a time at a fee. Hey presto, no interest. And if said Islamic person wants their gold then they can, in principle, go to the relevant depository and draw it out (minus a handling fee, naturally). Would interested credit card issuers form an orderly queue, please?”

Nowadays you’d implement the gold card as a cryptoasset that is institutionally linked to gold in a depository I suppose, but the idea of a turning store-of-value gold into means-of-exchange e-gold remains interesting: there are a great many people around the world who would prefer to pay and save in gold rather than any more modern medium. As it happens, the Royal Mint were go to have a go at this too with their RMG blockchain-based crypto asset until the spoilsports at the Treasury told them to knock it off and get back to making commemorative Brexit 50p coins.

So gold cards, or cards backed by gold or cards backed by assets backed by gold? My bet is that in the long run regulated token markets will win out but I’m genuinely curious as to your opinions on this.

[updated 29th October 2018 to include the government tell Royal Mint to stop crypto asset development.]

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!