A digital currency in Cold War? Yes.

News arrives from the fancy schmancy St. Moritz Crypto Finance Conference that the super rich investment persons there discussed the global cryptocurrency and digital currency scene. One particular phrase caught my eye. Multicoin Capital’s Beijing-based partner Mable Jiang said China’s goal is to leverage the rise of cryptocurrency to “supplant the dollar and become the world’s leading economic power” and then went on to say that “It’s a kind of Cold War… Currency is the leverage”.

Cold War.

Interesting choice of language.

The former Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo, who according to the Wall Street Journal is known as “Crypto Dad”, recently became co-founder of the Digital Dollar Foundation to advocate for a central bank digital currency (CBDC) for the U.S. He said that the term Cold War was a bit “strong” for the disparity between the U.S. and China in the digital currency space. To be fair, however, he didn’t know about my new book on the topic. My book “The Coming Currency Cold War—Cash and Cryptography, Hash Rates and Hegemony” will be published in June and launched at Money20/20 in Amsterdam.

Crypto Dad went on to say that he generally agreed the economic rivalry around digital currency was reminiscent of “the race to land on the moon”.

Another interesting choice of language.

Here’s a short extract from the book…

The important of digital currency therefore extends far beyond narrow issues of payments efficiency and wallet brand and into the wider economy. Hence it becomes a lever in economic competition. The analyst Dan Wang set the context for this competition in stark terms saying that:

China finds it politically intolerable that the US has an at-will ability to cripple major firms like ZTE and Huawei. It’s now a matter of national security for China to strengthen every major technological capability. The US responded to the rise of the USSR and Japan by focusing on innovation; it’s early days, but so far the US is responding to the technological rise of China mostly by kneecapping its leading firms. So instead of realizing its own Sputnik moment, the US is triggering one in China.

I found Dan’s reference to Sputnik rather interesting, since he is not the only observer who sees economic competition in those terms. This makes digital currency a key element of national strategy. Indeed, the race for hegemonic digital currency may be best understood in those terms. Writing a couple of years before Dan, Erik Townsend said in “Beyond Blockchain: The Death of the Dollar and Rise of Digital Currency” said that “de-dollarization is a catalyst leading to a new space race”, expressing a similar sentiment about the importance of driving forward the technology to obtain leadership.

Looks like we’re all on the same page. Or, in my case, the same couple of hundred pages. You can pre-order the book here at the London Publishing Partnership.

Bycatch

I tend to agree with people who see privacy as a function of control over personal information. Not a thing, more like a trade off. It’s a big problem though that the trade-offs in any particular situation are multi-dimensional and nothing like as explicit as they should be. And what if you have no possibility of control? The always interesting Wendy Grossman made me think about this in her recent net.wars column about her neighbour’s doorbell camera

As Wendy puts it “we have yet to develop social norms around these choices”. Indeed.

Whether it is neighbours putting up doorbell cameras or municipalities installing camera for our comfort and safety, the infrastructure of cameras (much more cost effective and useful than the one imagined by George Orwell) and pervasive always-on networks is going to created a decentralised surveillance environment that is going to throw up no end of interesting ethical and privacy issues.

Here’s an example. What happens if you set up a camera trap to photograph badgers but accidentally capture a picture of someone doing something they shouldn’t be doing? This is called “human bycatch” apparently. According to a 2018 University of Cambridge study, a survey of 235 scientists across 65 countries found that 90% of them had human bycatch. I’d never heard the word before but I rather like it. Bycatch, meaning collateral damage in surveillance operators.

The concept, if not the word, has of course been around for a while. I remember thinking about it a while back when I came across a story about some Austrian wildlife photographers who had set up cameras in a forest in order to capture exotic forest creatures going about their business, but instead caught an Austrian politician “enjoying an explicit sexual encounter” (as Spiegel Online put it). This was big news although (as one comment I saw had it) “if it had been with his wife it would have been even bigger news”. Amusing, indeed. But the story does raise some interesting points about mundane privacy in a camera-infested world.

I don’t know whether, in a world of smartphones and social media, one might have a reasonable expectation of privacy when having sex out in the woods somewhere. I would have thought not, but I am not a lawyer (or a wildlife photographer). It’s getting really hard to think about privacy and what we want from it and cases like this one remind us that privacy is not a static thing. It is not an inherent property of any particular information or setting. It might even be described as a process by which people seek to have control over a social situation by information and context.

In order to obtain privacy online we can use cryptography. In order to obtain privacy offline we are stuff with ethics and ombudsmen and GPDR and such like. This makes me think that people will start to move more and more of their interactions online where privacy can be managed – I can choose which identity I want when I present to an online shop, but I can hardly walk into an offline shop wearing Mexican wrestling mask and affecting a limp to evade gait detection.

Oh, Vienna

I was recently invited to the lovely city of Vienna by the lovely people at Mastercard to give a talk at an event about fun and interesting digital things. Here is photographic evidence of same…

Futurology


Now, one or two people may have been wondering why I was talking about Richard the Lionheart at a discussion about the electronic. money in Vienna. Well, for my friends around the world, here is the whole story!

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At the siege of Acre in 1191, during the Third Crusade, Richard the Lionheart supervised the building of siege engines to breach the walls of the city and thus led to its fall in July of that year. He immediately quarrelled with Duke Leopold V of Austria over the spoils of war and eventually tore down Leopold’s banner and sent his army on their way, thus ending early attempts at a common European foreign policy in the Middle East. In October, after decapitating 2,800 prisoners in another dispute with Saladin, Richard left for England to stop his brother Bad King John (“Lackland”) from usurping him.

NewImageKing Richard

On his way back to England, Richard could not go through France because John had come to an agreement with Philip of France that closed French harbours to him. He instead came via the Adriatic and was making his way overland when he was captured by Leopold near Vienna on 20th December 1192. Stories of his capture vary, but the most plausible version of events seems to me to centre on coins. Richard was disguised as a merchant and sent his serving boy to the market to buy provisions, but gave him coins minted in Syria that did not fail to attract attention in an Austrian village! It would be the same as paying with a £50 note in the Woking Weatherspoons today – people would talk. The coin caused Leopold’s men to pay particular attention to the boy, who showed up in the market a couple of days later with Richard’s ornate and expensive gloves – at which point he was taken and tortured to reveal Richard’s location in a nearby tavern.

Leopold was quite rightly excommunicated for this kidnapping by Pope Celestine III (imprisoning a crusader really did cross the line in the twelfth century) but he didn’t seem that bothered. He first imprisoned Richard in Dürnstein Castle and then sold him to the Holy Roman Emperor, Henry VI (who was also excommunicated).

Henry demanded a ransom for 150,000 marks for the release of Richard. This is something in the region of two billion quid at today’s prices but that figure doesn’t quite convey the magnitude of the ransom. Sending two billion quid from London to Vienna can be done today with a transit van full of 500 euro notes, but in 1193, the problem of moving something like twice the total annual income of the English Crown across a thousand miles of warring European principalities took some amazing logistics. This was a unique episode in English history and had far-reaching consequences. In 2006 my good friend David Boyle, author of the brilliant “Blondel’s Song: The Capture, Imprisonment and Ransom of Richard the Lionheart”, gave a superb talk on this early experiment in pan-European cross-border multi-currency funds transfer at the Digital Money Forum in London and his observations on the unpredictable consequences on the transition from a feudal to a money economy were fascinating.

In particular, without the use of coins, no such ransom would have been possible. David writes about the profound impact of this ransom on English government, noting that while the “accounts may have long since disappeared – and may even have been destroyed by those who felt embarrassed by the public record of their generosity to Richard when his brother was on the throne” this episode marked the beginning of the shift from feudal payments to the very start of taxing income.

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It would be impossible to imagine collecting taxes on such a massive scale (or, indeed, at all) in many modern countries, so the feat of collecting such a large sum of money from a medieval economy should not be underestimated. It took an inventive series of taxes, enforced and collected, to get the King back. In fact “both clergy and laymen were taxed for a quarter of the value of their property, the gold and silver treasures of the churches were confiscated, and money was raised from the scutage and the carucage taxes”. Scutage was the tax paid by knights to get out of military service. Carucage was the land tax.

The authorities had imposed carucage on anyone with property worth more than ten shillings. But this didn’t bring in the anticipated revenue, so later on it was turned into a full-blown land tax. It was first imposed in 1194 and fell upon landowners at an initial rate of two shillings per 100 acres. After Richard died in 1199 to be succeeded by John, who my friend Dominic Frisby in his book “Daylight Robbery: How tax shaped our past and will change our future” rightly called “one of the most infamous tax collectors in history”. John raised scutage and carucage many times and these taxes became one of the main causes of the discontent leading to the Magna Carta in 1215. This seminal document owes its existence not only to taxes, of course, but to wider a economic crisis: bad harvests, shortage of coin—as we will see—inflation, disruption of trade and a general decline in productivity under John.

(If you are wondering why people refer to Bad King John, even Graham Seel’s 2012 book “King John: An Underrated King” explains that a contemporary chronicle “The History of William Marshall”, otherwise known as England’s greatest knight, calls John faithless, unwarlike, unwise, mean, nasty and suspicious. His critics called him far worse.)

Through scutage, carucage and other taxes, the English gathered several tons of silver. David says twenty tons, but in Alison Weir’s “Eleanor of Acquitaine: By the Wrath of God, Queen of England“, the figure implied is considerably higher, more like fifty tons. The money was brought to London in the form of treasure (melted down to form ingots) and coins, which were all silver in those days.

(My 1962 copy of “Money in Britain” says that there were no continuously minted gold coins in England until the reign of Henry III (1216-72). The coins for the ransom must have been mainly in the form of the silver pennies brought into existence under Richard’s father, Henry II. His mint master, Isaac the Jew, set the 92.5 percent pure silver standard which became known as the “the ancient right standard of England” and continued until the 1920s!  In 1257 the twenty penny, that was one-twelfth of a pound Sterling, gold coin was struck. This didn’t last very long and in 1265 it was replaced with a twenty four penny “florin” worth one-tenth of a pound. There were still florin coins when I was a kid, as they were minted until 1967, but they didn’t have the same economic impact as Henry III’s florin which was worth a couple of hundred quid at today’s prices.)

NewImage

Queen Eleanor

Under Queen Eleanor’s direction, the growing piles of cash were stashed in the crypt of St. Paul’s, which was then the administrative centre of London. It took a long time to build the ransom there, since the Faster Payment System of the day was a horse and cart. When the Emporer’s men popped in in 1193 to see how things were coming along — checking out the tally sticks and the pipe rolls to assess the rate of collection and to take delivery of the first tranche of the ransom — there were only about fifteen tons of silver. This was loaded onto a fleet of ships and sent off to Henry. The collection continued and at the end of the year, on 20th December 1193, Queen Eleanor set off with the rest of the cash, arriving at Henry’s court on 17th January, so it only took three weeks.

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St. Paul’s Cathedral (before the Great Fire of 1666)

The money was transported to Henry under a simple pre-PSD2 regulatory structure, known as the “King’s Peril”, which meant that were the money to have been lost along the way, it was an English problem. Until the money was actually in Henry’s hands then it was Richard’s responsibility, even in Henry’s lands. Eleanor made it, and handed the balance of the ransom over on 4th February and Richard was released. He landed back in England on 13th March 1194, bringing this incredible episode in English history to an end and the only records of the greatest tax raid in English history that remained were the tally sticks.

Why did they send atoms, rather than bits about atoms? They had no alternative. The bill of exchange, the standard cross-border payment instrument in these pre-Bitcoin times, was a century away. And in any case, bills of exchange were not cheap. Peter Spufford in his magnificent Power and Profit, the Merchant in Medieval Europe, talks about the “specie point” at which it became cheaper to transport bullion than to buy a bill of exchange! And while bills of exchange boosted the money supply for commerce, they did not replace bullion, as sooner or later imbalances would need to be settled and so the wagon trains of gold and silver would rumble between trading centres.

The colossal ransom paid for Richard had some considerable consequences. The impact on Austria remains to this day. Leopold’s share of the ransom was used to build the new city walls of Vienna as well as to found the towns of Wiener Neustadt and Friedberg in Styria. It was also used to found the Austrian mint in 1194 to make coins from the silver handed over. This had an impact across central Europe as other rulers began to centralise their coinage too and local currencies began to vanish. Henry VI also created a new silver coinage (in Sicily).

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The impact back in England was also long lasting, and for one group of people in particular it was catastrophic. The Jews who, though few in number, were central to the economic life of England. This is why, as David Carpenter’s detailed commentary on the Magna Carta (released on the 800th anniversary in 2015) makes clear, there a several references to them in the Great Charter itself.

Throughout this period, the Jewish community in England were called upon to extend huge loans to the Crown to add to the ransom. This had a terrible consequence, because in order to provide these loans they had to call in their loans to other people — minor aristocrats, farmers, business people and so on — which caused great resentment against their community rather than the King (which was, of course, why it was done). In March 1194 a conference of Jewish financiers was organised in Northampton and representatives from major cities attended, other than (for example) York and Bury St. Edmunds, since the Jews in those places had already been slaughtered in the pogroms of 1190.

(These were widespread. Paul Johnson’s A History of the Jews, for example, tells how “all the Jews who were found in their own houses in Norwich were slaughtered”.)

The purpose of the 1194 conference was to work out how much more the Jews could contribute to the ransom, as indeed they were called on to do. Under Richard, there had been an inquiry into the pogroms and Christian-Jewish financial supervision committees created. David says these were partly an early attempt at banking regulation and partly to protect the Jewish community in return for its considerable contributions to the ransom. Christopher Dyer explores this further in Making a Living in the Middle Ages—The People of Britain 850-1520, saying that the Jews were the Crown’s mechanism for indirectly taxing landowners. The heavy taxes imposed on the Jewish community were passed on in interest rates, so that the common borrowers would blame the Jews rather than government spending for their reduced circumstances. Having come to England after the Norman conquest as moneychangers and bullion dealers, England’s Jews were reduced by a combination of taxation and murder until they were eventually expelled in 1290.

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A side effect of the silver exodus form England was that while local currencies circulated to substitute for the missing pennies for a while, the money literally ran out. After all, a quarter of England’s coinage had vanished (which David calls a “deflationary shock that England needed”), but somehow commerce continued. In the absence of a medium of exchange. Spufford reminds us that “Only in the short run did political, or occasionally religious, actions have greater effects than trade balances on the large-scale movement of silver and gold, coined and uncoined”.

It is an astonishing testament to England’s medieval wealth and administration that the very, very high level of taxation necessary to pay that (literally) King’s Ransom could be imposed and collected, yet in the long run the economy survived and grew.

20th December should be remembered in London and in Vienna.

Digital currency is getting serious

North Korea is, apparently, developing a digital currency of its own. According to Alejandro Cao de Benós, President of the Korean Friendship Association, the Democratic People’s Republic of Korea intends to go down the Facebook route by creating an asset-backed digital currency rather than a digital fiat currency and then use some sort of blockchain with “Ethereum-style smart contracts” to do business and avoid sanctions.

Why use a blockchain? Well, the regime sees such “smart” “contracts” as a way to enforce deals it makes with foreign counterparties. Since it doesn’t trust the U.N., it relies on Chinese intermediaries to enforce deals abroad. But sometimes, so sources claim, those intermediaries cheat the North Koreans. Hence, they want to bypass intermediaries altogether by developing a  “token based on something with physical value” (eg, gold) in order to create a stable mechanism for payments in international trade between the regime and “other companies/individuals” (although it will not be available to individuals in the DPRK, who will be stuck with the Korean Won).

(This is not a new idea, by the way. A couple of years ago, the Venezuelans tried a similar idea “the petro”, a digital currency to be backed by the country’s natural resources — diamonds, gas, gold and oil — to beat the “financial blockade” imposed by the U.S. and others. I will check the world currency markets later on, but my general sense of the matter is that the petro is yet to topple the Swiss Franc. It, may, however have served as a useful input to other regime’s feasibility studies.)

This is why U.S. (and other countries) care whether the North Koreans launch an eWon that stops them from being cheated in international transactions. As the Financial Times points out, the U.S. has a genuine and well-founded concern that, the financial implications of a change to U.S. currency hegemony to one side, foreign countries will increasingly use digital currencies, “such as Facebook’s planned Libra coin“, to avoid sanctions. Indeed, this was one of the arguments that David Marcus uses. He says, for example, that a Chinese digital currency running on a Chinese permissioned blockchain could mean the potential for “a whole part of the world completely blocked from U.S. sanctions and protected from U.S. sanctions and having a new digital reserve currency”.

Sanctions are a serious thing and cryptocurrency doesn’t have a magic shield against them. An Ethereum developer was recently arrested for violating U.S. sanctions against North Korea. According to the U.S. Department of Justice, one Virgil Griffith was arrested at Los Angeles airport and charged with violating their International Emergency Economic Powers Act (“IEEPA”) by travelling to North Korea to give a presentation about using cryptocurrency to evade sanctions. As observers pointed out, Mr. Griffith may have evolved a sub-optimal communications strategy in connection with his travel plans.

A North Korean digital currency has every chance of succeeding under the stewardship of the Korean Worker’s Party and the divine tutelage of Kim Jong-Un, the Dear Leader. His father, the previous Dear Leader, most famous for being the greatest golfer in history, was responsible for an earlier experiment in radical transformation through money, when the DPRK fell into chaos after his government revalued the currency and restricted the trading in of the old money (thus wiping out the personal savings of counter-revolutionary running-dog lackeys of U.S. imperialism).

When the North Korean people were not eating tree bark to stay alive, they must surely have noticed that the revaluation of the unit of account didn’t make the slightest difference to the supply and demand for goods and services. It made a difference to the market, though. The revaluation and exchange limits triggered panic, particularly among market traders with substantial hoards of old North Korean won — much of which became worthless. Gresham’s Law took immediate effect: the KRW disappeared from the marketplace and people began to use whatever hard currencies they could get their hands on. The Dear Leader therefore launched an attack on this as well, banning everyone (including foreigners) from using foreign currencies such as euros or dollars. The authorities started a TV campaign asking good citizens to report anybody using dollars directly and I imagine that the same will apply to digital dollars or electronic euros.

So, if a North Korean digital currency based on gold or whatever does appear, would it help the regime and others to avoid sanctions? Well, it depends. It is certainly possible to design digital currencies that have unconditional anonymity that Bitcoin (for example) does not. Perhaps this is what Mr. Griffith was explaining to the North Koreans in Pyongyang, although to be honest they could have discovered this for themselves on the Internet without too much trouble. So let’s imagine that they do indeed create such a beast, a bastard child of ZCash and Quorum. What will happen? Well, in a recent “war-game” of this scenario hosted by the Economic Diplomacy Initiative and co-sponsored by the Belfer Center for Science and International Affairs at Harvard (involving U.S. administration veterans, diplomats and academics), the rise of an encrypted digital currency attacked the dollar’s international position and ended up allowing North Korea to bypass sanctions and build an intercontinental ballistic missile. Ruh roh, as they say on the internet.

(The North Koreans have other options for disruption using digital currency, by the way. See John Cooley’s book on counterfeiting Currency Wars, which is about various attempts to destabilise countries by forging their currencies. He talks a lot about North Korea’s “superdollar” forgeries and the like. Now, think what the coming version of this might be: not counterfeiting physical money, but creating electronic money. I can’t help but wonder whether the shift to digital money for retail and person-to-person payments will make a modern-day Operation Bernhard — Hitler’s plan to undermine the British economy by forging £5 notes — easier or harder?)

The Foundation for Defense of Democracies (FDD), a Washington think tank, summarise the situation quite well in their position paper “Crypto Rogues” observing that “blockchain technology may be the innovation that enables U.S. adversaries for the first time to operate entire economies outside the U.S.-led financial system”. Now, while this may be technically slightly inaccurate (there are ways to create anonymous transactions without a blockchain, but let’s take this use of “blockchain” to mean “third-party anonymous digital currency”) it does accurately flag up that the widespread availability of decentralised financial services threatens to bypass the existing infrastructure. The FDD are surely right to say that “blockchain sanctions resistance is a long-term strategy for U.S. adversaries”.

Now, whether using the blockchain to create an immutable record of sanctions-busting transactions is a good idea or not I couldn’t say, but as a general rule I’m someone who believes in the democratic process and therefore I’d prefer it if sanctions could not be so easily evaded. Especially when you consider why the sanctions are there in the first place.

(A recent U.N. report estimates that North Korea has generated some $2 billion for its weapons of mass destruction programs using “widespread and increasingly sophisticated” cyberattacks to steal from banks and cryptocurrency exchanges. It makes you nostalgic for the days when hackers were stealing credit card numbers to access porn.)

No-one would imagine that a digital currency by itself would render sanctions ineffective. When the Iranian regime, for example, set up a venture to explore Bitcoin payments with a Swedish startup, the Swedish banks refused it a bank account because they themselves did not want to become subject to secondary sanctions. As US Treasury Secretary Mnuchin said at the G7 in July (talking about Iran), “If you want to participate in the dollar system you abide by US sanctions”. There is no doubt, though, that moving transactions outside of the international monetary and finance system could help to make other sanctions-evading tactics more effective by making it more difficult to track, trace and monitor transactions.

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.