OK, I promise, no more Bitcoin analysis

I have a fundamental character flaw, which means that I cannot resist making snarky points on Twitter through the use of oblique satire. In particular, as some of you may have noticed, I cannot resist poking fun at Bitcoin astrologers by tweeting purported explanations for Bitcoin price changes together with my own recommendations. Here’s the last one I posted… 

Just to be clear: this is utter nonsense that I made up in a few seconds, except for the recommendation, which is always real (from a poem, a song, a Bible verse, a famous quote or wherever). Here’s another example from earlier in the year which I just came across while searching for something else. I saved because it is special. 

Now, this tweet is utterly random (again, except for the Latin motto at the end: I googled for that). The point I am making is that this analysis is factually equivalent to any one of millions of reports from analysts about why Bitcoin is going up or down and whether you should buy or sell. Other than the rampant manipulation of a thin and opaque market, there are no fundamental reasons for the Bitcoin exchange rate to go up or down. As David Gerrard is fond of saying “because… number go up”.

Anyway, I made that tweet up in about 12 seconds by looking at the BBC News homepage. It is meaningless garbage. So why is it special? Well… you can imagine my surprise when I was contacted by a journalist asking if I could be interviewed for a cryptocurrency podcast*. I was very tempted but decided it would be dishonest to propagate fake news when I spend so much time complaining about it.

I contacted the journalist and explained that it was garbage that I’d made up. The journalist replied with good grace and said that my “appearance of wisdom” had fooled them. I liked this phrase so much that I wanted to change the name of this blog to it, but I decided that 15Mb is more obscure, so I’ll just make it my Twitter name for a while instead.

And no more Bitcoin analysis!

(I wanted to tell her that my basic knowledge of management consultancy meant that I could have provided a spreadsheet and a Powerpoint deck to back it up, but decided not to pull back the curtain on one of our vital industries.)

*Please note: this actually happened.

The real “challenger” banking business model is data, not money

I was quoted in The Economist (“Plug and pay”, 21st November 2019) talking about the impending reshaping of the retail financial services sector. Although the quote isn’t quite accurate — I was responding to the statement that a a bank is a balance-sheet, a factory that turns capital into financial products (such as loans and mortgages) and a sales force, I didn’t make the statement — the paraphrase is correct. Those first two activities are heavily regulated, as they should be, which is why Big Tech is uninterested are in them. They are more than happy to have banks, for example, do this boring, expensive and risky work with all of the compliance headaches that come with it. As noted in article, the Apple credit card is actually issued by Goldman Sachs (although it was Apple that caught the flack in the row about gender discrimination around credit limits) and the Amazon cards are issued by Chase, Synchrony and American Express. Similarly, the Google “checking” account (this is the American word for a current account, because they still use cheques, which must be something to do with the Continental Congress or something) is actually provided by Citi.

Open Banking Basic Options Updated Colour Picture

What big tech wants is the distribution side of the business, as shown in this old diagram of mine. They have no legacy infrastructure (eg, branches) so their costs are lower, but to my mind more importantly the provision of financial services will keep customers within their ecosystems. If you use the Google checking account and Google pay then Google will have a very accurate picture of your finances. As the article says “Amazon wants payments in-house so users never leave its app”. Indeed.

The business model here is very clear. What Big Tech wants isn’t your money (the margins on payments are going down) but your data. That’s why when people talk about “challengers” they should really be talking about Microsoft and not Monzo.

This is where there are some pretty serious implications. If Big Tech takes over consumer relationships, banks will end up having to give away margin but, far more seriously, data. Andrei Brasoveanu of Accel, a venture-capital firm, is quoted as saying that they could turn into “utilities, providing low-margin financial plumbing”. Well, that’s the lucky ones. The unlucky ones will be wiped out in a wave of consolidation and closures.

This isn’t a technology prediction, by the way. In Europe at least it is a regulatory prediction. Back in 2016, I wrote about regulators demanding that banks open up their APIs that “if this argument applies to banks, that they are required to open up their APIs because they have a special responsibility to society, then why shouldn’t this principle also apply to Facebook?”. My point was, I thought, rather obvious. If  regulators think that banks hoarding of customers’ data gives them an unfair advantage in the marketplace and undermines competition then why isn’t it true for other organisations in general and the “internet giants” in particular? This same point was just made by Ana Botin, Chairperson of Santander. My good friend Chris Skinner notes her comments to Bloomberg: “I need to know you and that’s based on data. Why should data be regulated in a different way if you’re called a bank and if you’re called something else”.

There are big changes coming, and banks and payment companies in particular are going to need effective strategies to survive. It’s not only a problem for those legacy incumbent dinosaurs that the happening new digital kids like to poke fun at. The fintech “challengers” also have a problem. Just as Big Tech has made ecosystems impervious to competition, so it could cross-subsidise (with data as well as with money) its financial services products to raise such a barrier to competition that no newcomer will be able to spend enough to gain traction.

There are some really big changes coming in retail financial services. And that’s not a prediction, that’s a fact.

Smart banknotes, dumb banknotes or no banknotes?

My good friend Chris Skinner comments on a report from Switzerland-based SIX on the likely trajectory of digital money. They identify the most likely scenario as “Digital Rules — But Cash Persists in a Fragmented World”, which they describe thus: Digital payments have substantially increased in convenience compared to cash as digital user interfaces expand into ever more human activities. At the same time, cash continues to be perceived and widely used as a ‘store of value’.

The use of a cash as as store of value in Switzerland reminded me of something that Larry White, someone who I always take very seriously in any such discussion, said a while back in the Cato Journal. Larry was writing about ceaselessness and he said that “some other writers and officials… do seek a cashless society… they want an audit trail for the law enforcement and tax authorities”. I think I’m probably in this category. While I appreciate the arguments of Larry and others about anonymity, I do not agree with them. This is because I do not see that the only two options as being anonymous physical cash or unconditionally traceable digital money. We have a wide variety of tools available to us to construct the next generation of digital money and some form of pseudonymous alternative is probably best for society as a whole.

Anyway, back to Switzerland. In his article, Larry noted that the Swiss National Bank (SNB) is “the most important central bank still bucking the trend”. It has said that it has no plans to withdraw its 1,000 Swiss Franc (CHF)  note. The highest-denomination banknote in the world, this is an inordinately profitable commodity. It costs about 40 centimes to make, generating a 250-fold seigniorage return.

I also read with interest the comments earlier in the year by SNB Vice Chairman Fritz Zurbruegg on the news that they are to continue production. Herr Zurbruegg said that there were “no indications” that criminals use the CHF 1,000 note more than any other note. So what are these notes used for? When I read the Swiss National Bank’s payment survey for 2017, the most recent at the time, I noted that is said that the 200-franc and 1000-franc notes accounted for a combined 23% of the total number
of Swiss banknotes in circulation, with 61 million and
50 million units respectively. These banknotes had a combined value of CHF 62 billion, or 76% of the value
of all banknotes in circulation.

Where are these banknotes? Apparently, three-quarters of Swiss households keep less than 1,000 Swiss Francs as a store of value, so obviously they aren’t using the CHF 1,000 that much. In fact, of the cash that is held as store of value, less than 5% is CHF 1,000 notes.

(The report goes on to say that “it should be borne in mind that respondents’ answers on this sensitive topic are likely to be not wholly reliable due to both security and discretion considerations”, which may point us in the direction of the actual use of the notes. It also notes the particular importance of the SFR 1,000 note in livestock trading. Presumably Swiss farmers find the payment facilities provided by the nation’s financial institutions to be inconvenient in some way.)

Still the main point is that less than a quarter of Swiss household have even one CHF 1,000, which given that they account for a substantial portion of the cash in circulation suggests a long tail: there are a few households with a lot of them.

Interestingly, in his comments on the continued production of the SFR 1,000, Herr Zurbruegg went on to say that should these notes be used for tax evasion, then “this is an issue for the legislators and authorities to prevent”. But as Cash & Payment News Volume 2, Number 3 (March 2019) goes on to observe about this perspective, in other industries the manufacturers are not allowed to wash their hands of the negative side-effects of their products (cars have to meet safety standards, for example). On the contrary, it is the manufacturers who are required to pay in some way for the potentail harrm that their product may cause.

The idea of making the producers of high-value notes (central banks) pay some sort of tax to compensate society for the damage done by those notes does, I’ll  admit, seem a little far-fetched. But the alternative, which is to considerably reduce the value of the highest-denomination notes, does not. Why not get rid of the US$100 (of which there are more “in circulation” than $1 bills) and the £50, for example. After all Denmark ignored a request by the European Central Bank and moved to ban 500-euro notes, as the country toughens it defenses against money launderers. Yay! Go Denmark! There really is no excuse for printing such high value notes in the modern world. Perhaps it was once a reasonable aspiration to displace the $100 bills stuffed into drug dealers’ mattresses with €500 bills and thus redirect the proceeds of crime (the seigniorage earned on those bills) from the Fed to the ECB, but no more.

(The head of Switzerland’s financial regulator, FINMA, is on record as saying that the Swiss financial system is susceptible to money laundering with the number of cases rising over the past five years, warns the head of Switzerland’s financial regulatory body, FINMA.)

So if the Swiss did decide to replace cash with a digital currency, then what digital currency should it be? Andréa Maechler, a member of the Swiss central bank’s board of governors, has already said that “private-sector digital currencies are better and less risky than nationally-issued versions”. So, Libra?

Interestingly the SIX report talks about the idea of smart banknotes with chips in them, an idea that was discussed by my colleagues at Consult Hyperion may years ago. Some of you may remember Paul Makin’s super presentation about “E-ink and smart banknotes” at the 13th Digital Money Forum in London back in March 2010. The presentation was based on some work that Consult Hyperion had been doing with the Bill & Melinda Gates Foundation all those years ago. At that time, we were thinking of a smart banknote as comprising four main technological components:

  • The note itself, made out of a plastic polymer rather than paper. This makes it durable and waterproof, important if it is to contain electronics.
  • The electronic ink display on the note. Electronic ink, as you’ll recall, only uses power when it is changing, so once the banknote display has been written then it will stay displaying the same thing until it changed.
  • The chip inside the banknote. Why do we need a chip inside the banknote? Well, we want the banknote to be secure: we don’t want it to be counterfeited or altered. And we need the banknote to be able to communicate intelligently with terminals.
  • The antenna connected to the chip. We wanted our smart banknote to be as convenient as a contactless card!

How would such a note be used? Well, we imagined that you would have a banknote that says “£10” on it. You to the coffee shop and spend £1.50 on a coffee. You tap the note on the till to pay, and the display now changes to say “£8.50”. When you get to work, your friend reminds you that you owe him £8 from the pub. You give him the note and he gives you a 50p coin in change. Your friend can absolutely trust that the value represented by the note is indeed £8.50 because the tamper-resistant chip and the cryptography it deploys make it impossible to counterfeit!

It was interesting to see these ideas come back after a decade! SIX say that “traditional cash infrastructure risks disruption from smart banknotes infrastructure” and they even go on to talk about a “smart Libra banknote”. Frankly, I doubt either of these propositions because, as far as I recall, the main reason for looking at the idea of smart banknotes in Africa many years ago was to provide for security for populations without mobile phones. I am not sure if that makes sense any more in Africa, but it certainly doesn’t in Switzerland where three-quarters of the population use smartphones, half of online purchases are made using bank transfers and (according to JP Morgan) “digital wallets are used to pay for 20 percent of online transactions, and the method is expected to grow to take a 24 percent share of the market by 2021… and local payment brands, including Twint and its domestic rival SwissWallet, are also popular”.

I don’t understand why anyone uses banknotes there, dumb or smart.

The Birchers. An Everyday Story of Payment Folk. Part 97: Cheques, Mate

For inexplicable reasons, and in response to events too boring to relate, an insurance company sends us a cheque for 20-something quids. I don’t know why. I’ve never paid them with a cheque so far as I am aware. They know my bank account details and they know that I live in Woking, not 1972.

I put the cheque in my bag, meaning to pay it in next time I go to a bank branch, which might be any time in the next three to five years. I forget all about it.

For no reason, I was walking past a bank branch today when I remembered the cheque. So I went to one of the pay-in-a-cheque machines. But them I remembered I didn’t have my debit card with me, because I live in the modern world and use my phone to pay for things.

While I’m standing around looking confused, a helpful Barclays assistant person asks me what the problem is. I explain. He shows me that you can manually enter the sort code and account number and then feed the cheque. So I do this. Then as I’m walking out, I remember that I’ve got another cheque for a tenner or so which was a refund for buying something online that I returned.

But now there’s someone using the machine, but I can see that the counter position is open. So I go to the nice woman at the counter and ask if I can pay in this cheque manually as I know the sort code and account number. She asks if I have the Barclays Bank app on my phone, which of course I do, and I use it all the time. Well, she tells me, you can pay in cheques using the app now.

WAT!

She directs me to the relevant menu, which I tell her does not have anything about cheques it, and wouldn’t you know it, now it does. Hurrah! My app has sprouted a new “Pay in a cheque” button! So I pressed it, took pictures of my cheque and that’s that. I’ll let you know how it goes.

Barclays App

It’s like living in Count Zero or something. I just checked, and the cheque was credited to my account same day. I am so happy! When someone sends me a cheque, it’s like they’ve set me homework. But no more! At last Fintech is making my life better. Joy unbounded.

Some off-the-cuff comments on in-the-cuff payments

It’s amazing what sort of things trendy youngsters in the payments space are getting up to these days. Only today, I read that the UK-based DressCode has released “the ultimate in geek chic“, which turns out to be a shirt with a pocket in the cuff to hold a contactless chip for payments.

The ultimate in geek chic? Sorry dudes. I had a Thomas Pink “Commuter” shirt back in 2006! The Commuter shirt had two features that I really liked at the time. It had a channel running up the inside to carry earphone cables tucked away out of sight. These connected through a hole in a side pocket so that you could keep your iPod snug and out of the way while strolling through London’s fashionable West End listening to the mighty Hawkwind. The shirt also had that second pocket in the cuff to hold a contactless card.

It was designed really for Oyster cards, but we put Visa cards in the pocket to make purchases using standard POS terminals with contactless interfaces. As I recall, we bought a few of them as presents for some of our favourite customers as well! Anyway, I went upstairs and got it out of the wardrobe to model it for you:

Untitled

The point I used to make was that contactless was about more than the interface, it was about form factors and that it would lead to innovation and I used the shirt to show an example of innovation beyond the card itself. Although the shirt was fun and helped to make an interesting demo about contactless payments in conference presentations, I thought it had two design flaws.

First of all, the pocket was behind the cuff on the top of the wrist. This meant you had to lay the back of your forearm across the contactless POS terminal or Oyster card reader. The pocket really should have been on the underneath of the forearm near the wrist to make paying a more natural action.

The second problem was that if you were wearing a suit and coat, it was hard to get the card close enough for the reader. I remember thinking at the time that I wished that the pocket was in my suit rather than in my shirt.

Naturally, being a consultant rather than an entrepreneurial business go-getter my thoughts went no further. I was surprised to see that only eight years later some entrepreneurial Aussies went and did just as I’d thought about, and put the payment card pocket in the suit! I found out that the dynamic and chic (I assume) menswear specialists M.J. Bale and Visa had teamed up to create a suit with a contactless payment chip and antenna woven into the sleeve! Apparently the “power suit will let men pay ‘invisibly’ wherever Visa payWave is accepted”. I expect they were planning something for the ladies too but it’s not mentioned in the article.

 

Anyway, how fun. These days of course I wouldn’t use either the cable run (because I have AirPods – in fact I have AirPods2 which are absolutely awesome) or the card (because I have a smartphone and that’s what I use to pay). Nevertheless, I wish DressCode all the best with their chic project.

Unknown, known and verified

The stain of racism in football is, you will be unsurprised to learn, not confined to Bulgarian stadia. It’s a serious and unpleasant problem on social media too. To the extent that the noted association footballer Mr. Harold Macguire has been talking about it. According to The Daily Telegraph, “Maguire urged Instagram and Twitter to make users identify themselves in the same way as betting apps after his teammate Paul Pogba was subjected to a torrent of ‘disgusting’ racial abuse from anonymous trolls”.

Many other people seem to think that we should do something about this. Following Mr. Macguire’s analysis, the historian Damian Collins MP (chair of the Digital, Culture, Media and Sport select committee in the UK Parliament) said “Account verification should be more widely available and become the norm. I think accounts should be verified, it can’t be right that cowards and racists can hide behind the anonymity of social media to attack people, often using multiple bogus accounts”. This is an interesting observation that jumbles two different issues together: proving the account “David Beckham” points to a specific person, and proving that the specific person it points to is the former Manchester United winger David Beckham. The first is about attaching attributes to a real-world entity, the second about is about the reputation of the real world identity. Thinking these two things through separately is, I think, a key to finding a workable solution to the social media mess, but back to that later.

Another MP, the lawyer Norman Lamb (chair of the Science and Technology select committee) also commented, saying that if social media companies did not act to clean up abuse then the incoming online regulator should take action. It’s not clear to me what he means by “clean up abuse” since it seems implausible that Twitter could monitor billions of messages every day to remove those that cause any offence to anyone (I assume Mr. Lamb doesn’t want them to remove tweets calling for human rights in certain countries, for example).

(In fact it is not at all clear to me what the incoming regulator is going to do at all, but that it is a different matter.)

It’s also not clear to me what MPs and other commentators mean by “bogus accounts”. But from the context, I assume that they mean accounts that cannot be linked to some other identifier that MPs think is a legitimate form of identity, such as the aforementioned passport.

It’s not a new or interesting idea to try to link social media accounts to government-issued identity, as they do in (for example) China. A while back, to pick on one example, the noted entrepreneur Mark Cuban adumbrated Mr. Maguire by saying that “It’s time for @twitter to confirm a real name and real person behind every account, and for @facebook to to get far more stringent on the same. I don’t care what the user name is. But there needs to be a single human behind every individual account”.

Cuban is as wrong about the real names as Macguire and the MPs are, because anyone familiar with the topic of “real” names knows perfectly well that they make online problems worse rather than better. One example that springs to mind to illustrate this is when the dating platform OKCupid announced it would ask users go by their real names when using its service (the idea was to control harassment and promote community on the platform) but after something of a backlash from the users, they had to relent. Forcing the use of real names in a great many circumstances will mean harassment, abuse and perhaps even worse.

You can understand why. Why on Earth would you want people to know your “real” name? That should be for you to disclose when you want to and to whom you want to. In fact the necessity to present a real name will actually prevent transactions from taking place at all, because the transaction enabler isn’t names, it’s reputations. And pretty basic reputations at that. I think that online dating, frankly, provides a useful way of thinking about the general problem of online identity. In this case, just knowing that the object of your affections is actually a real person and not a bot (remember, in the famous case of the Ashley Madison hack, it turned out that almost all of the women on the site were actually bots) is probably the most important element of the reputational calculus central to online introductions, but after that? Your name? Your social media footprint? 

There are plenty of places where I would not want to log in with my “real” name or by using any information that might identify me: the comments section of national newspapers, for example. “Real” names don’t fix any problem because your “real” name is not an identifier, it is just an attribute (refer back to the David Beckham example) and it’s only one of elements that would need to be collected to ascertain the identity of the corresponding real-world legal entity anyway. 

What social media needs, and what will help with Mark Cuban’s actual problem with being sure that there is a “single human” behind an account, is the ability to determine whether you are a known real person or not. The problem with bots on social media is just as serious as the problem of racism. Without commenting on the politics of an individual issue, I could have chosen any of a thousand examples to make this point. Here’s just one, from the UK press yesterday: “Almost all of the ten most active Brexit Party supporters on Twitter appear to be automated bots, according to new research“.

The way forward is surely not for Twitter et al to try and figure out who is a bot and whether they should be banned (after all, there are plenty of good bots out there) but for Twitter et al to give their users the choice. Why can’t I tell Twitter that I only want to see tweets from real people that can be identified? It’s none of my business who the person actually is and it’s none of Twitter’s business either. But if someone knows that @dgwbirch is a real person, that’s enough. Harry Macguire can read my tweets in comfort, knowing that if I commit a criminal offence then the police can go to someone to find out who I am.

So who is that someone who knows whether I am a real person or not? Working out whether I am a person or not is a difficult problem if you are going to go by reverse Turing tests or Captchas. It’s much easier just to ask someone else who already knows whether I’m a bot or not.

There are plenty of candidates. There’s the Post Office I suppose. And the school. And the doctor. In fact, there are lots of people who could testify to my existence. But the obvious place to start is my bank. So, when I go to sign up for internet dating site, then instead of the dating site trying to work out whether I’m real or not, the dating site can bounce me to my bank (where I can be strongly authenticated using existing infrastructure) and then the bank can send back a token that says “yes this person is real and one of my customers”. It won’t say which customer, of course, because that’s none of the dating site’s business and when the dating site gets hacked it won’t have any customer names or addresses: only tokens. This resolves the Cuban paradox: now you can set your preferences against bots if you want to, but the identity of individuals is protected.

What is crucial here is the IS_A_PERSON attribute. Twitter, for example, should mark my account as of unknown origin until it sees this attribute. Of course, Twitter will want to see it in the form of a verifiable credential signed by someone who they can sue if it turns out I’m not a person after all, but you get the point. When I sign up to Twitter I am “unknown”. When they get a valid IS_A_PERSON credential from me, then my status changes to to “known”. Once I am known, then I can go on to be verified if I want to be.

Uknown to Verified - LinkedIn Version

 

Most normal people, I imagine, will leave their Twitter account in the default setting of “known only”. Some people might want to go tighter with “verified only”. If nutters want to post racist abuse about footballers, then they will be posting it to each other and the vast majority of us will never be bothered with them again.

(When I last tried to get my account verified at Twitter, they turned me down. They didn’t say why, but presumably they thought that some of my tweets must have been machine-generated or something.)

Look. This is an important issue that I have been posting about for years, to no avail. Anne Marie Slaughter summed the situation up in the FT last year, saying that “with the decline of traditional trusted intermediaries, and the discovery that social media account holders may well be bots, we will crave verifiability”. This is absolutely spot on, and we need to construct the networks capable of delivering this verifiability or we collapse into a dystopian discourse where no-one believes anything. The knee-jerk “present your passport to use Twitter” is not the way forward. Technology means that we can deliver verifiability in a privacy-enhancing manner, so let’s do it.

Where’s “Sign in with Barclays”?

In my keynote speech at KnowID 2019 in Las Vegas, I said that we needed think about the big picture around digital identity. I said that digital identity should be seen as a fundamental defence in the cyberwar that we are already in and that has no imaginable end. It’s possible that some of the people in the audience felt that I was being hyperbolic and that this piece of conference rhetoric was for entertainment purposes only. In which case I must refer them to the recent comments of General Sir Nick Carter, Britain’s Chief of the Defence Staff, who said that our nation is “at war every day” due to constant cyberattacks. Even more interestingly, he then went on to say in the modern world there is no longer a distinction between war and peace (my emphasis).

This is precisely as the great media theorist Marshall McLuhan predicted. Indeed, I quoted him in my speech. In Culture is our Business, written nearly 50 years ago, he said that “World War III is a guerrilla information war with no division between military and civilian participation”. This is why we need to take digital identity seriously, as strategic infrastructure and as matter of national urgency. It’s not about making it easier for people to log in to The Daily Telegraph or Woking Council, although that should surely be a by-product of a well-designed system, it’s about keeping our people, our institutions and our democracy safe.

(I saw Paul Chichester, the Director of Operations at the UK National Cyber Security Centre, speaking about this at the P20 conference in London. In addition to telling the delegates that “cybercrime paid for that North Korean submarine launch”, he observed that it is the centenary of the Government Communications Headquarters (GCHQ) and that they have special exhibition about this over at the Science Museum. Since I spent formative time in my career working on secure networks for GCHQ, I’m really looking forward taking at look at this when I’m in London next!)

So what should we do?

I don’t think the answer for us it to build a centralised identity service (such as Aadhar in India) or a centralised reputation management system (such as China’s social credit score). I think we need to think about more sophisticated and more flexible federated options. I think we should start building an identity infrastructure for the modern world and that we should probably start with the banks. Citi put out a paper about this last month: it’s called “The Age of Consent” and it discusses the idea of a federated financial sector solution, something along the line of the Scandinavian bank ID services. (I contributed to the paper.)

You can see the author, Tony McLaughlin of Citi, talking about it here on Finextra TV saying that “if we fix digital identity, we fix payments”, and he’s got a point. Banks have an obvious and significant interest in creating the new infrastructure because it’s good for banks. But it’s also good for everyone else, so it’s not only a way for banks to save money, it’s also a way for banks to create new products and services that mean new revenue streams. In fact, it could be that digital identity is not simply an additional revenue stream in the future but that identity is bigger than payments to banks. You can watch Alessandro Baroni, CMO of equensWorldline, saying just this today on another Finextra TV interview.

In the UK, it is time for the regulators to demand action from the banks. When I was last asked to log in to a web site to buy something (last weekend) I was presented with the option to “Log in with Amazon” and “Log in with Facebook” but no option to “Log in with your safe and trusted bank digital identity that is part of a regulatory framework designed to protect you and your personal information and comes with expectations of redress, ombudsman, accountability and, ultimately, a physical presence to resolve issues”. Why not?

SHCs are sick, as the kids say

Now, of course, when techno-determinist mirrorshaded hypester commentators (eg, me) say that the future of money might be somewhat different to the Bretton Woods II structure and that perhaps the decentralising nature of computer, communications and cryptographic (CCC) together mean that there might be currency issuers other than central banks (as, for example, I did in Wired magazine two decades ago), this might be dismissed by scenario planners and strategists as cypherpunk-addled babble.

It seems to me, however, that the reflections of sensible, knowledgable and powerful players is tending int the same direction. Mark Carney, governor of the Bank of England, recently gave a speech at Jackson Hole, Wyoming, in which he said that [Central Banking] a form of global digital currency could be “the answer to the destabilising dominance of the US dollar in today’s global monetary system”.

Wow.

Mr. Carney went on to talk about the idea of “synthetic hegemonic currency” (abbreviated to SHC by everyone else but abbreviated to SyHC by me so that I can pronounce it “sick”). An obvious example of such a currency would be an electronic version of the IMF’s Special Drawing Right (SDR). In fact the former boss of SDRs has already put forward such a proposal, asking for the IMF to “develop a procedure for issuing and using market SDRs following currency board rules and backed 100% by official SDRs or by an appropriate mix of sovereign debt of the five basket currencies”. This, of course, sounds a little like Facebucks (or “Libra” as they are more properly designated) and, indeed, it is.

So what would be the difference between holding Facebucks and holding eSDRs? Well, for one thing, Facebuck currency board basket will not include Yuan. In responses to questions from a German legislator, Facebook have said (Reuters, September 20th) that their basket will be:

  • One half US dollar,

  • Euro 18%,

  • Yen 14%,

  • Sterling 11% (although why anyone would be this in “stable” basket right now is beyond me), and

  • Singapore Dollar, 7%.

The composition of the SDR varies from time to time, but the current basket (last reviewed in 2015) is:

  • 41.75% US dollar,

  • 30.93% Euro,

  • Yen 8.33%,

  • Sterling 8.09%, and…

  • Yuan, 10.92$%.

So Libra vs. eSDR (or Libra vs. A Chinese digital currency) comes down to the Yuan. I think the Wall Street Journal (September 23rd) is right to characterise the fascinating future of digital currency as a “coming currency war” between digital money and the Dollar, saying that “The U.S. dollar has been the world’s dominant currency since the 1920s. But if national digital currencies allow for faster, cheaper money transfers across borders, viable alternatives to the U.S. dollar could emerge, embraced by nations and monetary officials concerned about the dollar’s outsize influence on the global economy”.

This is about so much more than permissioned vs. permissionless or proof of work vs. proof of state.

SIBOS, Star Trek and the end of Bretton Woods

Here’s a story I came across that I found so interesting that I discussed it in my book about the history and future of money, “Before Babylon, Beyond Bitcoin”. It is a utopian future fiction that happens to have something to interesting to say about money, which is why it caught my eye. This is somewhat unusual for a utopian vision since, as Nigel Dodd observed in his 2014 book “The Social Life of Money“, utopias from Plato’s Republic to Star Trek don’t seem to include money at all, never mind M-PESA or Bitcoin.

Anyhow, the story that interested me has a ‘guy falls asleep under hypnosis and awakes a century later to find a model society, then finds it’s all a dream’ narrative arc that is hard to read with modern eyes, because the perfect society that the author imagines is a communist superstate that looks like Disneyland but run by Stalin. Everyone works for the government, and since government planners can optimize production, the ‘inefficiency’ of the free market is gone.

During his adventures in this new world the narrator, the time travelling protagonist, is told by his host in the modern era (the good Doctor Edward Leete), that cash no longer exists. Instead, the Doctor informs him, the populace use ‘credit cards’ for retail transactions. (He then, as it happens, goes on to describe what are in fact offline pre-authorized debit cards imagined in the technology of the day, but that is by-the-by.)

While the author does not talk about the telephone, laser beams or the knowledge economy, he does make a some insightful predictions about the evolution of money. When talking about an American going to visit Berlin, the good Doctor notes how convenient it is for international travellers to use these ‘credit cards’ instead of foreign currency: ‘An American credit card,’ replied Dr Leete, ‘is just as good as American gold used to be’.

This is an excellent description of our world after the end of the gold standard and the rise of a dominant reserve currency, what economists call the  “Bretton Woods II” era of monetary history. A clever prediction indeed. However, I think that the most fascinating insight into the future of money comes later in the book, when the time traveller asks his twenty-first-century host ‘Are credit cards issued to the women just as to the men?’ and the answer comes back ‘certainly’.

That answer might alert you to the age of the text, which in fact contains the earliest mention of a credit card that I have found anywhere as part of a fictional narrative. The book is by the American author Edward Bellamy and is called “Looking Backward, 2000–1887“. It was written in 1886, a century before the credit card became the iconic representation modern money, and it was one of the best-selling books of its day. I had a 1940s edition in front of me as I wrote my book, so it was still being reprinted sixty years later!

I cannot help but reflect that the discourse on money in that book is a wonderful example of how science fiction is not really about the future at all but about the present: the retort ‘certainly’ is clearly intended to surprise the Victorian reader as much, if not more, than the his prediction of glass tunnels that surround pavements when it rains.  It took a writer, not an economist or a technologist, to ask a simple question about money and get a surprising answer. Hold that thought.

Predictions are hard, especially about the future of money

Now let us have a go at predicting the financial system half a century onwards. Where do we start? Well, a good rule of thumb for futurologists is that if you want to look 50 years forward, you need to look at hundred years back because of the increasing pace of change. A hundred years back we had the telephone and global markets connected by instant, global communications. We had the Bank of England and the Federal Reserve. We had wire transfers. We had the world’s first commercial aviation service, created as it happened to accelerate the clearing of cheques between Chicago and New York.

A century ago we were also coming to the end of the era of the classical gold standard. The demise of that global financial system was brought about by the pressures of global conflict and depression that ultimately led Britain to abandon it permanently in 1931 after a temporary suspension that began in the middle of First World War and lasted until 1925. Some people think we are now coming to the end of the Bretton Woods II era and, as The Economist observed recently (“Into the woods”, 17th August), saying that international trade is complicated because “most countries have their own currencies, which move in idiosyncratic ways and can be held down to boost competitiveness”, it is not at all clear what is coming next!

If this is correct, and it seems likely that it is, then then what will replace the IMF, central banks and commercial banks offering credit when it comes to creating money, facilitating payments and prosperity? The reaction of regulators around the world to one alternative, Facebook’s proposed “Libra” digital currency, seems to indicate that the incumbents are not going to give up with out a fight. Yet given the history of financial markets and institutions, and given that we know that change is inevitable as the structures reshape under social, regulatory and technological pressures, it is not good enough to simply say that the incumbents are wrong. We (ie, the financial industry) must help to create a vision of future banking that helps us all – and I include the regulators in this – to shape strategies that lead to a financial sector that serves society better.

But what vision?

If we set aside both the misplaced view that the status quo will prevail and the Bitcoin maximalists fantasies of a completely decentralised society, where do we look to find believable alternatives? We all hear the speeches of the regulators, read the annual reports from the bankers, see the demos of the technologists and the slide decks of entrepreneurs. But have any of these created a vision in your mind? Perhaps it’s time to return to my opening observations to develop a narrative just as surprising to contemporary audiences Bellamy’s was to a Victorian one.

So. What do we now see a couple of generations from now. The world of Star Wars with a “galactic credit” that is universally accepted. That doesn’t seem right to me. A single currency doesn’t really work between Germany and Greece, so how it would work between Earth and LV-426? Would the use of a Synthetic Hegemonic Currency (SHC), to use Mark Carney’s words in the Financial Times (“Mark Carney calls for global monetary system to replace dollar”, 23rd August 2019), function in these circumstances as a trade currency for the universe?

 

What about the world of Star Trek with no money at all, save the gold pressed latinum of the Ferengi (shown above), valuable because it’s the only substance that the replicators can’t produce? How about the world of Charles Stross’ “Neptune’s Brood” where there is fast money and slow money that relies on cryptography so it only travels at one-third the speed of light?

How will people transact? Will it be the world in Robert Heinlein’s “Beyond the Horizon” where the government has an “integrated accumulator” (what we would now call a blockchain) to record all transactions and the finance minister has dashboard to see just how the economy is doing? The integrated accumulator sounds very much like the “compubank” in Margaret Attwood’s “The Handmaid’s Tale” which tells what happens if this machinery falls under the influence of fanatics, in that case as theocratic US administration that bans and blocks women’s payment cards? Will cash, indeed, be banned or will it simple be cash as in William Gibson’s “Count Zero” where the protagonist finds himself in a near future where he  “had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff, it was just that no- body ever did anything legitimate with it”. (Which, frankly, sounds like Sweden rather than some future dystopia.)

What if money as we know it vanishes as a transactional medium of exchange? Will it be the world of Bruce Sterling’s “Distraction” in which distributed servers manage reputation as a currency, a theme also present in Cory Doctorow’s “Down and Out in the Magic Kingdom”. I am naturally attracted to these images of a future in which identity, trust and reputation reconnect us with our neolithic heritage (indeed, a few years ago I wrote a book called “Identity is the New Money”) and dispense with many kinds of intermediaries! Will this free us or will it fulfil the prophecy of the Book Of Revelation 13:16-17 that “no man might buy of sell save that he has the mark, or the name of the beast, or the number of his name” enslave us? Should we begin our scenario planning for these transactional environments now (hint: yes) or should we leave the technologists to choose a future for us?

Next week, for the Innotribe closing keynote of most important global banking conference of the year SIBOS, my good friend Brett King and I will be looking how writers have thought about the future of payments, banking and money to see if their narratives can help us to formulate strategies in this space and to see if we can find the hard question and surprising answer for the world of 50 years from now. I have an idea of what it might be, but let’s see how Brett, me and the Innotrible audience develop our thinking on the day. See you there.

China’s digital currency may set the benchmark, not Libra

As I wrote a while ago, the Chinese were first with the great transition from commodity money to paper money. They had the necessary technologies (you can’t have paper money without paper and you can’t do it at scale without printing) and, more importantly, they had the bureaucracy. In 1260, Kublai Khan became Emporer and determined that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper ‘cash’ to iron bars, to pearls to salt to specie, so he decided to implement a new currency. Then, as now, a new and growing economy needed a new kind of money to support trade and therefore prosperity. The Khan decided to replace copper, iron, commodity and specie cash with a paper currency. A paper currency! Imagine how crazy that must have sounded! Replacing physical, valuable stuff with bits of paper!

 

Just as Marco Polo and other medieval travellers returned along the Silk Road breathless with astonishing tales of paper money, so commentators (e.g., me) began tumbling off of flights from Beijing and Shanghai with equally astonishing tales of a land of mobile payments, where paper money is vanishing and consumers pay for everything with smartphones. China is well on the way to becoming a cashless society, with the end of its thousand year experiment with paper money in sight. Already a significant proportion of the population rely wholly on mobile payments and carry no cash at all, much as I do when heading into London.

The natural step from here is to create digital currency so that settlement is in central bank money and there are no credit risks. Now, the People’s Bank of China (PBoC) is run by smart people and as you might imagine they have been looking at this strategy since back in 2014. It now looks as if Facebook’s Libra initiative has stimulated or accelerated their tactics. I read in Central Banking [PBoC sounds alarm over Facebook’s Libra] that PBoC officials had “voiced worries” that [Libra] could have destabilising effects on the financial system and further stated that the bank would step up its own efforts to create an e-currency.

This is no knee-jerk reaction. Way back in 2016, the then-Governor of PBoC, Zhou Xiaochuan, very clearly set out their thinking about digital currency, saying that “it is an irresistible trend that paper money will be replaced by new products and new technologies”. He went on to say that as a legal tender, digital currency should be issued by the central bank (my emphasis) and after noting that he thought it would take a decade or so for digital currency to completely replace cash in cash went to state clearly that “he has plans how to gradually phase out paper money”.

(As I have written before, I don’t think a “cashless society” means a society in which notes and coins are outlawed, but a society in which they are irrelevant. Under this definition the PBoC could easily achieve this goal for China.)

What would be the impact of phasing out paper money? Yao Qian, from the PBOC technology department wrote on this subject back in 2017, noting (as I have done) that a central bank digital currency (CBDC) would have some consequences for commercial banks, so that it might be better to keep those banks as part of the new monetary arrangement. He described what has been called the “two tier” approach, noting that to offset the shock to the current banking system imposed by an independent digital currency system (and to protect the investment made by commercial banks on infrastructure), it is possible to incorporate digital currency wallet attributes into the existing commercial bank account system “so that electronic currency and digital currency are managed under the same account“.

I understand the rationale completely. The Chinese central bank wants the efficiencies that come from having a digital currency but also understands the implications of removing the exorbitant privilege of money creation from the commercial banks. If the commercial banks cannot create money by creating credit, then they can only provide loans from their deposits. Imagine if Bitcoin were the only currency in the world: I’d still need to borrow a few of them to buy a new car, but since Barclays can’t create Bitcoins they can only lend me Bitcoins that they have taken in deposit from other people. Fair enough. But here, as in so many other things, China is a window into the future.

Whether you think CBDC is a good idea or not, you can see that it’s a big step to take and therefore understand the PBoC position. There is a significant potential problem with digital currency created by the central bank. If commercial banks lose deposits and the privilege of creating money, then their functionality and role in the economy is much reduced. We already see this happening because “Alipay, WeChat Wallet, and other Chinese third party payment platforms use financial incentives to encourage users to take money out of their bank accounts and temporarily store it on the platform itself” [China’s Future is Definitely Cashless].

In summary, then, a couple of year ago I wrote that the PBoC were not going to issue cryptocurrencies and they were not going to issue digital currencies either (at least in the foreseeable future). What I said was that what they might do is to allow commercial banks to create digital currency under central bank control. And this indeed what seems to be happening. According to the South China Morning Post, the new Chinese digital currency “would be centrally controlled by the PBoC, with commercial banks having to hold reserves at the central bank for assets valued in the digital yuan“.

How will this work? Well, you could have the central bank provide commercial banks with some sort of cryptographic doodah that would allow them swap electronic money for digital currency under the control of the central bank. Wait a moment, that reminds me of something…

Yep, that’s how Mondex was structured 25 years ago. (If you don’t know what Mondex was, here’s something I wrote about it 20 years on.) There was one big different between Mondex and other electronic money schemes of the time, which was that Mondex would allow offline transfers, chip to chip, without bank (or central bank) intermediation. Would a central bank go for this today? Some form of digital cash that can be passed directly from person to person like Bitcoin rather than some form of electronic money like M-PESA, using hardware rather than proof of work to prevent double spending? Well, it was being tried in Uruguay, but I’m not sure how that pilot is going, although is was not quite the same thing as Mondex because the phones would not be exchanging fungible value but tokens that could ultimately be traced and tracked and monitored, but it’s interesting nonetheless.

 Mondex Paraphanalia

When I wrote about this back in 2018, I said that I thought it was unlikely that the PBoC would allow anonymous peer-to-peer transfers, so I was very surprised to see a Reuters report [6th September 2019] quoting Mu Changchun, deputy director of the PBoC’s payments department, saying about the proposed Chinese digital currency that “its ability to be used without an internet connection would also allow transactions to continue in situations in which communications have broken down, such as an earthquake”.

This would seem to mean that the system will allow offline transactions, which means that value can be transferred from one phone to another via local interfaces such as NFC or Bluetooth. If so, this would be truly radical. I wondered if something was mistranslated in the Reuter’s piece so I went to the source speech (albeit via Google Translate!) and I discovered that this is in fact precisely what he said. Talking about the project, which is called the DC/EP (digital currency and electronic payment) tool, he said that it is functionally “exactly the same as paper money, but it is just a digital form” and went on to confirm that

DC/EP can realize value transfer without an account. In the specific scenario, as long as there is a DC/EP digital wallet on the mobile phone, no network is needed, and as long as the two mobile phones touch each other, the transfer function can be realized… “Even Libra can’t do this,” Mu Changchun said”.

Wow. That’s huge. Libra can’t do it, and never will be able to. To understand why, note that there are basically two ways to transfer value between devices and keep the system secure against double-spending. You can do it in hardware (ie, Mondex or the Bank of Canada’s Mintchip) or you can do it in software. If you do it in software you either need a central databse (eg DigiCash) or a decentralised alternative (eg, blockchain). But if you use either of these, you need to be online. I don’t see how to get the offline functionality without hardware security.

If you do have hardware security and can go offline, then we are back to the question of fungibility again. Here the PBoCs principle is both clear and very surprising.

Mu Changchun said that the public has the need for anonymous payment, but today’s payment tools are closely tied to the traditional bank account system, can not meet the consumer’s anonymous payment needs, and can not completely replace the cash payment. The central bank’s digital currency can solve these problems. It can maintain the attributes and main value characteristics of cash and meet the demands of portability and anonymity.

Wow. They are serious. He goes on to say DC/EP will work the same way as banknotes.

Commercial banks open accounts at the central bank, paying 100% of the total amount, and individuals and businesses open digital wallets through commercial banks or commercial organizations. DC/EP is still replaced by M0 and is legally compensated. For users, just download an app to register, you can use a digital wallet, and recharge cash withdrawals need to dock traditional bank accounts.

I wonder if this will bring interoperability? If DC/EP is really to work as banknotes do then the e-RMB in my bank app and my Alipay app and my WeChat app much be interoperable. I must be able to transfer value from my Alipay app to your WeChat app. If PBoC crack that they will be on the way to one of the world’s most efficient electronic payment infrastructures.

There was a final part to the speech which I did not understand at all, so perhaps a Chinese correspondent more familiar with DC/EP can clarify the meaning. The speech covers “smart” “contract” by which I assume PBoC means apps that use the DC/EP to execute on the handset (since there is no blockchain), but this is my assumption.

Mu Changchun said on several occasions that the central bank’s digital currency can load smart contracts. However, if a smart contract that exceeds its monetary function is loaded, it will be degraded into a value-for-money ticket, reducing its usable level, which will adversely affect the internationalization of the RMB. Therefore, digital currencies will load smart contracts that favor the monetary function, but remain cautious about smart contracts that exceed the monetary function.

I am baffled by this, which I am sure reflects my ignorace of advanced electronic money technologies, but I don’t think that this deflects from my overall observation that if the PBoC goes ahead and launches a person-to-person offline capable CBDC then that will be not only a nail in the coffin of cash but an event as significant and momentous in monetary history as the paper notes of the Khan a millennium ago.