The law of entirely expected consequences case study: payment surcharges

Our Prime Minister, Mrs. Theresa May, went a bit Trump and tweeted. Cool. And here it is.


 The odd thing about this is that every single part of it is manifestly and demonstrably untrue. I’m genuinely baffled as to why Mrs. May (who spent 12 years working at the Association of Payments and Clearing Services, the precursor to UK Payments) should make such a transparently false claim to obtain credit for something that she should be against. To be clear: the charges were not hidden, the ban is not only on credit and debit card surcharges, and it won’t help millions of people to avoid rip-offs. Let me explain, starting with what I saw on 13th January when I went to pay for a flight on British Airways…

My first "no surcharge" purchase

Now normally when I use my BA Amex card to book a flight, I have to pay a credit card surcharge. I don’t mind paying the surcharge because I want the protections that the use of credit cards give me as a consumer and also because I want the frequent flier points I get for using this card. As of 13th January, I don’t. I get all this stuff for free because “new rules which will come into effect on 13 January 2018 will mean you cannot be penalised for choosing to pay by card, either online or in-store”. Happy days. Thank you Mrs. May!

Unfortunately, the entirely predictable result of this ban on card surcharges is that prices will go up.  For the press to say that ban has “backfired” because “consumers face higher prices and new ‘service charges’ as retailers and businesses plan to circumvent the Government’s ban” is laughable. The ban has worked entirely in accordance with the laws of economics.

To see why, let’s go back to Mrs. May’s odd social media message. First of all, the ban on card surcharges is not because of Mrs. May or the British government. It is because of the European Union’s Second Payment Services Directive (PSD2), although in the UK the government has gone further than PSD2 by, essentially, banning surcharges for all electronic payments not just the “four party” schemes. Thus it was the EU that banned “credit or debit card” surcharges, not the British Government, it is indeed the British Government, rather than the EU, that is making poor people pay for my air miles.

Now, just a quick recap of Economics 101. If the government passed a law that (for example) health care is free, that wouldn’t mean that doctors would start working for nothing. It would mean that doctors would have to paid in some other way (out of general taxation, for example). Similarly, passing a law that retailers cannot surcharge for cards doesn’t mean that everyone at Barclaycard is now working for free. Yes, the government has stopped retailers for charging for cards, but that does not mean that the costs are not going to go away. Chip and PIN terminals, 3D Secure gateways and Section 75 chargeback guarantees don’t grow on trees. What will happen?

Suppose you are an online merchant selling, oh I don’t know, let’s say Dungeons and Dragons miniatures. Let’s say your card service comes from a top quality merchant service provider who charges you 25p per transaction. From 13th January…

  1. Well, they could stop taking cards. But that would mean they lose business.

  2. They could have a loyalty scheme (spend £50, get £5 off your next purchase) but only for people who pay with cash.

  3. If half their sales are cash and half on card, then they could put the price of the average basket up by 10p. This is a nice simple solution and it’s good for me, since the customers who pay with cash are now subsidising my John Lewis cashback (since I’m only paying the extra 10p not the full 25p).

  4. Or they could try it on and add a service charge of 25p to all orders. This is what, for example, Just Eat have done.

But why should these dastardly people be allowed to get away with any of these options? Why shouldn’t they be forced to simply accept lower profits and a reduced standard of living as suggested by The Daily Telegraph which is upset that “retailers and other companies are planning measures to ‘sneak’ around the rules“. The dastardly plots unveiled by The Telegraph, precisely as you would expect from an analysis of the environment, are those that I outlined above: refusing card payments, increasing prices and introducing new ‘service charges’.

This is ridiculous from The Telegraph. Refusing to accept cards because the government has made it uneconomic is not sneaking around the rules, it is responding to the rules. And unless The Telegraph is proposing to step in and pay the cost of accepting cards for all merchants, neither is increasing shelf prices. In fact, I absolutely guarantee that prices will rise in accordance with basic laws of economics that The Telegraph should be familiar with. Unlike government ministers, apparently. The Economic Secretary to the Treasury, Mr. Stephen Barclay, said “these small charges can really add up and this change will mean shoppers across the country have that bit of extra cash to spend on the things that matter to them”. How? I have no idea. The UK travel industry, for example, pays around £150m per annum in card charges. Who does Mr. Barclay think is going to pay for the cards, terminals, fraud, bad debt, guarantees and all the rest of the infrastructure in the future? 

The result of banning card surcharges (ie, price-fixing for payment services) will be two-fold. First, it will push retailers into having their own apps that exploit open banking and use instant payments instead of cards. I can assure you that I won’t book a holiday or buy an expensive sofa this way: I want the legal protections that come with credit cards. However, the costs of accepting cards gives these merchants plenty of margin of to play so they will be able to incentive customers away from the existing rails. Second, it will transfer money from poor consumers who are trapped in the cash economy to people like me with cashback and airmiles cards. As the media have belatedly noticed (having not asked me about it in advance) “even those paying cash are set to lose out, as some companies – including food delivery firm Just Eat – plan to apply the cost increases to all customers

The outcome, as it happens, may be even more perverse. Since debit cards cost merchants less than credit cards, consumers switching to credit cards to get the rewards will mean the merchants overall bill for accepting cards will go up! This will hit hard in travel, for example, where “removing the surcharge will result in a significant shift away from payments by debit card and bank transfer so the increase [in extra costs] will be greater than the current credit card surcharge”. Not my words. “Greater than the current credit card surcharge”. So prices will rise by more than the current surcharge, despite Mr. Barclays’ odd prediction that shoppers around the current will have “that bit of extra cash”. No, shoppers around the country won’t. But certain shoppers (eg, me) will, because it the cost of the flight goes up by £1 but I would have had to pay a £2 service charge to use my rewards card before, I’m now saving a £1 and still getting the rewards.

I have long maintained that if you are going to regulate anything in this field then what you should do is require retailers to make the costs of payment choices clear and then let the market do the work. If the government wants to take action, it should adopt my plan to minimise the total social cost of payments and make debit cards the “zero”. In other words, companies should not be allowed to surcharge for debit cards and banks should be required to provide zero interchange debit cards as a condition of holding a retail banking licence. If companies want to surcharge for payment instruments that have a higher overall total social cost (cheques, cash, credit cards, charge cards, cowrie shells or euros) then that’s fine. And there would be a logic to it, unlike the current situation. Meanwhile, “consumer experts have called for regulatory enforcement to ensure businesses cannot dodge the rules“. 

This is absolutely hilarious. Who are these experts? What Soviet-style commission is going to take control of the taxi company’s pricing policy and decree what level of service charge, if any, is to be allowed? The whole situation is nonsensical. If the government, merchants or anyone else thinks that the costs of accepting cards are too high, then they are free to create an alternative that is less expensive. And if merchants want to know how to create an alternative lower cost option for customers *cough* open banking *cough* then they should feel free to call me and I’ll put them in touch with the right people (hint: Consult Hyperion).

Crime of the (new) century

Here’s something that I’m surprised we don’t see more of. Pavel Lerner, the CEO of the cryptocurrency exchange Exmo Finance, has been released by kidnappers after the payment of a $1 million bitcoin ransom. According to the Financial Times, the Ukrainian interior minister specifically labelled the crime “bitcoin kidnapping and extortion”. I would have asked for Monero, rather than traceable bitcoins, but there you go.

Given the number of Bitcoin millionaires wandering around — I bump into them at every conference I go to these days — you would have imagined that the more enterprising and forward thinking members of the cosa nostra (the coder nostra, as I call them) were out in force. Stand around outside Consensus or Money2020 and bundle most anyone into a van and drive them off into the desert and you’re sure of a Bitcoin, Ripple, Ether or Bitcoin Cash payday. It’s a puzzle that this doesn’t happen all the time, although it’s entirely possible that it does and that I never get to hear about it because I’m not rich enough, just like those Silicon Valley sex parties.

So is kidnapping for cyber-ransom the defining crime of the 21st century? Actually, I suspect not. What if, rather than traditional money–related crimes such as kidnapping and extortion, there were much better crypto-crimes invented in parallel to the new forms of crypto-money made available by technology? Is there such a crime that is unique to this virtual world? Not a virtual shadow of a crime that has been around since year zero, but a wholly new crime for the virtual world? Actually, one such crime was invented many years ago. It’s the “assassination market” that I wrote about in “Before Babylon, Beyond Bitcoin“.

An assassination market is a prediction market where any party can place a bet (using anonymous crypto-currency through the TOR network) on the date of death of a given individual, and collect a payoff if they “guess” the date accurately. This would incentivise the assassination of specific individuals because the assassin, knowing when the action would take place, could profit by making an accurate bet on the time of the subject’s death.

Here’s how the market works. Someone runs a public book on the anticipated death dates of public figures. If I hate a pop star or politician, I place a bet on when they will die. When the person dies, who ever had the closest guess wins all of the money, less a cut for the house. Let’s say I bet a fiver that a specific TV personality is going to die at 9am on April Fool’s Day 2018. Other people hate this personality too and they put down bets as well. The more hated the person is, the more bets there will be.

April Fool’s Day comes around. There’s ten million quid bet on this particularly personality. I pay a hit man five million quid to murder the personality. Hurrah! I’ve won the bet, so I get the ten million quid and give half to the hit man. I don’t have to prove that I was responsible for the assassination to get the money and no-one can pin the crime on me because I paid the hitman in untraceable anonymous electronic cash as well: I’m just the lucky winner of the lottery. If someone else had bet 31st March and murdered the television personality themselves the day before, then it would only have cost me a fiver, and I would have regarded that as a fiver well spent.

This is a rather an old idea that originated, as far as I know, with Jim Bell, who back in 1995 wrote an essay on “assassination politics” that brought the idea to the popular (well, amongst a nerd subgroup) imagination. I suppose it was inevitable that the arrival of digital currency would stimulate thought experiments in this area and it was interesting to me then (and now) because it showed the potential for innovation around digital money even in the field of criminality. If I hire thugs to lure a cryptobaron to a hotel room and then beat him up to get a $1m in bitcoins from him (as actually happened in Japan recently), that’s just boring old extortion. If I use Craigslist to lure a HODLer to a street corner and then pull a gun on him and force him to transfer his bitcoins to me (as actually happened in New York back in 2015), that’s just boring old mugging.

 

Now, as I explained in the FT some years ago, Bitcoin is not a very good choice for this sort of cyber-criminality. It’s just not anonymous enough for really decent crimes or the darkest darknets. Hence my scepticism about the claims that Bitcoin’s long term value will be determined by malevolent money mischief. But as I explained to students at Winchester College last week, if there were to be an actually untraceable cryptocurrency then an assassination market is a much better bet for the coder nostra than the physically demanding felony of kidnapping.

Voter ID is back, and this time it’s in Woking

Well, Woking is in the news. It is going to be part of a pilot scheme at the forefront of the UK’s non-existent identity non-strategy to not introduce a working digital identity infrastructure to our great nation at any time in the foreseeable future The government has decided that voters in five areas in England will be asked to take identification to polling stations at local elections next year, and Woking is one of those areas. The report doesn’t mention just how the entitlement to vote is to be established but we already know what array of high technology machine learning AI super intelligent giant killer robot world brain quantum neuro-computing systems are to be deployed, because local authorities will be invited to apply to trial different types of identification, including forms of photo ID such as driving licences and passports, or formal correspondence such as a utilities bill.

Wait, what? It’s pointless enough showing a trivially counterfeitable physical identity document to someone who can’t verify it anyway, but come on… a utilities bill? That’s where we are in 2017 in the fifth richest country in the world? In Scott Corfe’s recent Social Market Foundation report A Verifiable Success—The future of identity in the UK he highlighted what he calls the “democratic opportunity” for electronic identity verification to facilitate internet voting thereby increasing civic engagement. Well, I agree. But that’s a long way from showing a gas bill to a polling station volunteer.

(And what does ‘local authorities will be invited to apply’ really mean anyway?  They’ve already been ‘invited’ to adopt the national Gov.UK Verify identity service. Very few did, and fewer still continue, so five might be ambitious. And where they do, are we disenfranchising voters who don’t feel like forging documents if they don’t come from the mainstream demographic — a point also made in the SMF report — thus distorting the outcomes).  

Now, I’ve written before that I am in favour of electronic voting of some kind but I’m very much against internet voting, because I think that in a functioning democracy voting must remain a public act and if it is allowed in certain remote conditions then we cannot be sure that a voter’s ballot is either secret or uncoerced. I think it is possible to imagine services where trusted third parties or electoral observers of some kind use mobile phones to go out and allow the infirm or otherwise housebound to vote, but that’s not the same thing as just allowing people to vote using mobile phones. I think internet voting is a really bad idea, but I take Scott’s point about the need for digital identity. However, since we don’t have one and I don’t see any prospect of Government producing a robust one in the foreseeable future, we’re stuck with gas bills until someone gets to grip with issue.

(I should explain here for any baffled overseas readers of this blog that the United Kingdom has no national identification scheme or identity card or any other such symbol of continental tyranny, so our gold standard identity document is the gas bill. The gas bill is a uniquely trusted document, and the obvious choice for a government concerned about fraud. By the way, if for some reason you do not have a gas bill to attest to your suitability for some purpose or other, you can buy one here for theatrical or novelty use only.)

Woking Polling Station

Why is it that the government never ask me about this sort of thing? Since they don’t have an identity infrastructure, why don’t they use other people’s? I would have thought that for a great majority of the population, especially the more transient and younger portion of the electorate (e.g., my sons) social media would provide a far better means to manage this entitlement. I’ve written before that I judge it to be far harder to forge a plausible Facebook profile than a plausible gas bill, so if I turn up at the polling station and log in to the Facebook profile for David Birch (if there is a Facebook profile for a David Birch, incidentally, I can assure you that it isn’t me) then they may as well let me vote.

None of this will make the slightest difference to the central problem, of course, because the main source of electoral fraud in the UK is not personation at the polling station but fraudulently-completed postal ballots, a situation that led one British judge to call it “a system that would disgrace a banana republic”. Indeed, this is precisely what has been going on in my own dear Woking, where four people were jailed recently for electoral fraud. As far as I can understand it from reading the various reports, including the source reports on electoral fraud in the UK, the main problem is that postal votes are being completed by third parties, sometimes in bulk. No proof of identity is going to make any difference to this and so long as we allow people to continue voting by post I can’t see how the situation will improve. So: it is not beyond the wit of man to come up with alternatives to the postal vote. But that’s not what is being proposed. The UK government is not currently proposing an app or any other kind of electronic voting here, it is merely proposing to add a basic test of entitlement at the ballot box.

When this scheme was originally announced, the minister in charge of voting (Chris Skidmore) was quoted by the BBC as saying that “in many transactions you need a proof of ID” which is not, strictly speaking, true. In almost all transactions that we  take part in on a daily basis we are not proving our identity, we are proving that we are authorised to do something whether it is to charge money to a line of credit in a shop, ride a bus or open the door to an office. In these cases we are using ID as a proxy because we don’t have a proper infrastructure in place for allowing us to keep our identities safely under lock and key while we go about our business.

If we are to implement the kind of electronic identity verification envisaged by the Social Market Foundation, then what you should really be presenting at the polling station is an anonymised entitlement to vote that you can authenticate your right to use. It is nobody at the polling station’s business who you are and, in common with many other circumstances, if you are required to present your identity to enable a transaction then we have created another place where identity can be stolen from. The real solution is, of course, not about using gas bills or indeed special-purpose election ID cards, but about introducing a general-purpose National Entitlement Scheme (NES). If memory serves, I think this is what my colleagues at Consult Hyperion and I first proposed in response to a government consultation paper on a national identity scheme a couple of decades ago. Oh well.

Really breaking banks

I can’t stress enough just how big a deal the UK’s transition to Open Banking is. The writer Wendy Grossman posted an excellent piece about this in her “net.wars” series recently. She said, without exaggeration in my opinion, that the “financial revolution” coming here in mid-January has had surprisingly little publicity perhaps because “it’s not a new technology, not even a cryptocurrency. Instead, this revolution is regulatory: banks will be required to open up access to their accounts to third parties”. As Wendy notes in her piece, Wired had a great article about this (written by Rowland Manthorpe) in October. Having talked to some of the key players and examined some of the key concepts, he draws an important conclusion, which is that open banking is not “just a technical fix, or even a solution specific to banking, but a new way of dealing with the twenty-first century’s most sought-after resource, personal data“.

He is spot on. Identity is, as some people maintain, the new money. Banks are about to be transformed from places that store digital monies (which they really don’t anyway, since the proportion of household wealth held in the form of demand deposits has already fallen to minuscule levels) into places that store digital identities. Now, this is hardly a new idea and it isn’t only techno-crackpots like me who keep going on about it. Back in 2014, the Financial Times was reporting that “Britain’s high street banks believe their future role will be as repositories of more than just money: they want to be the safe place where customers store their digital identities”. This makes complete sense as a strategy and as a European Banking Association (EBA) white paper of the time put it, “banks are well positioned” to be a crucial, supporting, positive part of their customers online lives. Banks know this to be the case, they just haven’t done much about it. I still can’t use my Barclays identity to open an account at RBS, much less to log in to Direct Line or Bet365.

Since that FT piece, some people (uncharitable persons, of whom I am not one) have suggested that banks will pratt about and muck it all up and hand digital identity on a plate to Apple, Facebook, Google, Amazon and Microsoft (the GAFAMs). Well, we’re going to start finding out in January, because I can’t help but feel that the major beneficiaries of the regulators pressure to open up the banks will not be nimble fintech startups but the internet giants who already have the customer relationships. Rowland speculates that open banking may expose some institutions to change and to competition that they simply cannot respond to. He even goes as far as to suggest that banks may well fail because of it. This is the sort of thing that they must have been mulling over down at Open Banking Limited, the entity set up to implement open banking in the UK, where the Implementation Trustee, Imran Gulamhuseinwala, “doesn’t seem to have much sympathy for failing banks”.

Now, having met Imran at dinner (with the Russian Ambassador, as it happens) I can confirm that he is one smart cookie (and a very nice guy too). He’s got a point about the competition that open banking should unleash, but when RBS goes under because all of its customers have shifted to Facebook and the bank becomes a low-margin heavily-regulated pipe that is not operationally-efficient enough to compete only on price and service levels, I suspect others may have a different perspective. Either way, I agree with Erik Tak, Head of the ING Payment Centre, who said at Trustech in Cannes this year (below) that the people who will benefit most from this opening up of retail banking will not be fintechs but those GAFAMs mentioned earlier.

Tak at Trustech

Wendy’s words are well chosen. Open Banking is a revolution, and all we can say for sure is that there is going to be change. But as to who the winners and losers are… well, the UK is about to become an interesting, exciting and unpredictable laboratory experiment in banking regulation. In a year or two, we may at least have a signpost to the future of retail banking in place.

Art and science in Bristol

Well, that was fun. I had the great honour of being invited on to a panel at the Festival of Economics, part of the Bristol Festival of Ideas. I’d never been to the festival before, but I really enjoyed it. It’s a very impressive event, and I’m not just saying that because my publisher, Diane Coyle, founded it. What I found especially impressive, apart from the sheer size of the audiences at the sessions I attended, was that the festival seemed to achieve its goal of bringing serious discussion of important topics to the general public. In our session we have a great audience and they gave us a wide variety of topics to deal with in the Q&A. All in all, an excellent event.

Green Room

I was talking about the future of money with Professor Steve KeenDaniela GaborTatiana Cutts and stand-in chair Romesh Vaitilingam who did a great job moving things along. I’m pleased to say that the session was lively and well-attended.

One of the topics that came up, naturally, was whether Bitcoin was a form of cash or not. Remember that US IRS Ruling about Bitcoins being a commodity, so that traders would have to track the buying and selling price of each individual Bitcoin in order to assess their tax liability? No? Here’s a reminder: “the real lesson from the IRS Bitcoin ruling is that for a currency—or any payment system—to work, its units must be completely fungible”. Now, fungible (from the Latin “to enjoy”) is a great word. One of my favourite words, in fact. In this context (ie, money) it means that all of the tokens are the same and can be substituted one for another. You owe me a pound. It doesn’t matter _which_ pound coin that you give me. Any will do. Any pound coin can substitute for any other pound coin because they are all the same: no-one can distinguish one pound coin from another. This isn’t true of Bitcoins. They are all different, and because they are all different, their history can be tracked through the blockchain. As the MIT Technology Review pointed out, while Bitcoin has a media reputation for providing privacy, analysis of the blockchain suggests it could be surprisingly easy for a law enforcement agency to identify many users of the currency. Actually, recent analysis of the blockchain provides much other interesting information, including the fact that around a quarter to a fifth of the bitcoins already mined are lost for good.

The idea of money that isn’t fungible but that can be tracked, traced and monitored reminded me of Nitipak Samsen’s winning entry in the Consult Hyperion 2011 Future of Money Design Award, an example that I include in my book. I used it to make the general point that if you want to look into the future you need to listen to artists as well as technologist. Anyway, I mentioned the Award on stage and a couple of people came up afterwards to ask more about this particular entry and the competition in general, so if you are one of them and you’d like to learn more, check it out here.

Have you ever wondered where the money in your pocket had come from? Who was the previous owner? Who was the owner before that? Might it be a famous celebrity?…

[From Money Trailer – Future of Money]

It is interesting to me to see these different perspectives (Nitipak’s artistic imagination about the bastard child of Facebook and Bitcoin, and the more technical ideas about fungibility) coming together and, to my mind, again illustrates just why the FOM Design Award became such a popular session at Consult Hyperion’s Tomorrow’s Transactions Forum. We (technologists) need artists to help us to imagine alternative futures.

So. TL:DR…

Bitcoin isn’t cash, because cash is fungible. If we want something to be cash, we need to make it fungible. But do we want cash? I’m always ready to listen to informed views, but right now my general feeling is that the costs outweigh the benefits.

Life imitates art, even in payments

A few years ago, I took part in an entertaining event at the British Computer Society (BCS) during which my alter ego, Mr. Don Rogers from the Isle of Man Economic College, set out a new payment system. During this talk (you can see the video here), Mr. Rogers proposed the “Crime Pays System” or CPS. Under this system, digital payments would be either “light” or “dark”. The default transaction type would be light and free to the end users. All transaction histories would be uploaded to a public space (we were, of course, thinking about the Bitcoin blockchain here) which would allow anybody anywhere to view the transaction details. This “Light Exchange” is designed to promote an environment of social accountability. The alternative transaction type would be dark. With this option advanced cryptographic techniques would make the payment completely invisible, leaving no trace of the exchange, thus anonymising all transactions. A small levy in the region of 10% to 20% would be paid per transaction. The “Dark Exchange” would therefore offer privacy for your finances at a reasonable price. The revenue generated from the use of this system would be taken by the government to substitute for the loss of taxes in the dark economy.

Pretty whacky, way-out, left-field thinking, yes? Well, I must in all honesty admit that it was not my idea. Like all such concepts way ahead of their time, it has its origins in art, not technology. The idea came from my good friend and wonderful artist, Austin Houldsworth. As you may know, for many years Consult Hyperion ran the Future of Money Design Award as part of the annual Tomorrow’s Transactions Forum. Austin organised this award and he also designed the cover for my book Before Babylon, Beyond Bitcoin. In fact, here he is showing me the machine that he built for the cover photo of the book.

Welcome to the Machine

 

Well, it’s taken a few years, but Austin’s idea is a few steps closer to reality, since Coin Telegraph reported that just such a payment system is being proposed for Russia. And our guess of a 10-20 percent holding tax was remarkably accurate, since what is being proposed in Russia is apparently a 13% tax.

The CryptoRubles can be exchanged for regular Rubles at any time, though if the holder is unable to explain where the CryptoRubles came from, a 13 percent tax will be levied. The same tax will be applied to any earned difference between the price of the purchase of the token and the price of the sale.

From BREAKING: Russia Issuing ‘CryptoRuble’

That’s pretty amazing if you ask me, but it does illustrate a general point about futurology, which is that sometimes the technologist’s roadmap can be a less accurate guidebook than artists’ imaginations.

Whether we achieve a mostly cashless society sooner or later should be left to technological advancement.

From Should We Move to a Mostly Cashless Society? – WSJ

No, it shouldn’t. This is a matter of great importance and with significant implications for society. The strategy should be set by society, not by technologists. And we need to make some big decisions about it fairly soon, otherwise we will allow technology (that is, technology companies) to create an environment that we may not be comfortable with. What might that environment be? Well, it won’t be like 1984 (for one thing, we didn’t need the government to come around an install screens to watch us all the time, we bought them ourselves from Apple and Samsung and Google). I don’t think it will be like Star Trek either, partly because of the physics and partly because of the money-free utopianism. I think it will be more like the future set out a few decades ago by the “cypherpunk” writers who predate the internet and social media but saw which way the wind was blowing. I’m not the only one who thinks that “we are, roughly, living in the world the cyberpunks envisioned”.

There’s a nostalgia around that word cypherpunk for me, because it’s now many years back I saw these visions and was captivated by them. A quarter of a century ago, my Consult Hyperion colleague Peter Buck and I wrote an article for the “Computer Law and Security Report” (Volume 8, Issue 2, March–April 1992, Pages 74-76), asking whether William Gibson’s work was science fiction or informed prediction (clearly, we thought it was the latter). The article (called “What is Cyberspace” [Ref] [PDF]), which tried to explain the idea of cyberspace to a lay audience (this was before Netscape, the year zero of the modern age, so most lawyers had never been online), turned out to be rather popular. I like to think that one of the reasons was the conviction that we were exploring the actual future, not a hypothetical future. I can’t remember where the idea of the paper came from, but I do remember that we chose extracts from Gibson’s brilliant writing to illustrate the concepts rather than trying to paraphrase, and I still get a thrill from reading them now.

That’s king hell ice, Case, black as the grave and slick as glass. Fry your brains as soon as look at you

[From “What is Cyberspace?”]

I loved the idea of the “black ice” then and I love it now. In the Gibson world, Intrusion Countermeasures Electronics (ICE) refers to security software that protects data form unauthorised access, and black ice is ICE so deadly that it can kill a hacker. Wonderful. It came back to me a couple of years ago when I turned on BBC radio at random while driving home, only to discover that someone was reading one of my all-time favourite books, Gibson’s “Burning Chrome”, and the mention of the black ice gave me that chill all over again.

Writing this blog post I can still remember the shock of reading Gibson’s 1984 masterpiece “Neuromancer” for the first time. (Gibson later called this work an optimistic view of the near future because it assumes only limited nuclear exchanges between countries – let’s hope he’s right.) Why was it such a shock? Well, since leaving university I’d found myself specialising in secure data communications. I worked on one of the first secure LANs for the UK government, on secure satellite communications for banking, on secure military networks for NATO, that sort of thing. I understood computer networks, but I didn’t grok them. I didn’t feel what it meant, where it was taking us.

Reading Gibson back then was like lifting a veil from parts of my own brain. I took an artist to give me vision and vocabulary. And what a vocabulary it was. My very favourite William Gibson quote, right after “the future is already here, it’s just unevenly distributed” is about money. It comes from his novel “Count Zero” and it’s about the cashless society. I re-use it shamelessly in presentation after presentation.

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 nobody ever did anything legitimate with it.

 Use of Cash in Sweden

As I’ve written before, we are heading toward a cashless society, cashless in this Count Zero sense, where cash will still be around and it will still be legal tender (although I don’t think people understand what a limited concept that is), but it will disappear from polite society and from the daily lives of most people. This vision of a cashless society, not a society where there is not no cash but a society where cash is irrelevant, may have seemed outlandish twenty five years ago, but it’s a pretty accurate description of Sweden now (where only a tiny fraction of retail payments are cash)  and China soon. The future is less unevenly distributed than it was even a decade ago.

[An edited version of this piece was posted to Medium, 16th October 2017].

Don’t listen to me, listen to Christine Lagarde

Now, you may think that all this talk about digital currencies is just unhinged techno-determinism when it comes from me, and you can safely ignore it, but when it comes from Christine Lagarde, the head of the International Monetary Fund (IMF) and pillar of the Washington Consensus, you have to take it seriously. In a talk given to the Bank of England conference on “Central Banking and Fintech” (29th September 2017), she said that virtual currencies [by which she means digital currencies in my taxonomy] could actually become more stable than fiat currencies. She says “for instance, they could be issued one-for-one for dollars, or a stable basket of currencies”. This idea of creating a what is strictly speaking a digital currency board is not new and I was interested to see Ms. Lagarde’s mention of a basket of currencies as a viable option. In my recent book “Before Babylon, Beyond Bitcoin” I discuss this as one of the potential futures for money, with reference to the vision of a former Chancellor of the Exchequer. Many years ago, John Major proposed just such an extremely sensible alternative to the euro, which at the time was labelled the “hard ECU”.

The idea of the hard ECU was to have a pan-European digital currency (it would never exist in physical form) but still be accepted in all member states. I am not alone in thinking that this was a missed opportunity. Keith Hart, author of the brilliant “The Memory Bank“, a book about money from an anthropological perspective, wrote that it was a big mistake to replace national currencies with the euro. He further pointed out that the hard ECU would have meant politically-managed fiat currencies alongside a low-inflation alternative, a plural option enjoyed by countries that didn’t join the euro, like Britain and Switzerland. I couldn’t agree with Keith more.

The hard ECU, or as I used to like calling it, the e-ecu was always a better idea than the Euro but when John Major proposed it, he was ignored. He envisaged a cross-border currency for businesses and tourists to use. Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs and no foreign exchange risk and tourists could have hard ECU payment cards that they could use across the continent. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cards — and the cost of replacing them would have been saved.

 Global money

Real Money.

When researching the hard ECU concept for my book, I discovered that the proposal goes back well before Ms. Lagarde and Mr. Major and back into the early days of Margaret Thatcher’s government, in a 1983 report of the European Parliament on the European Monetary System. The proposal was at that time supported across the political and national groups in the parliament, including by the Germans so long as the central bank only concerned itself with stability of the currency (as subsequently transpired). It was taken up by Mrs. Thatcher’s government as a practical single currency for Europe, a means to expand the UK’s financial services industry across a European single market. But it never made it and the later political drive for the euro sidelined it. 

The point is, though, that it was a feasible option and that a digital currency that is backed by a reserve (whether of dollars or some basket of currencies or, indeed, commodities) is a sensible idea. In fact, it’s already being tried in a couple of places. In Kenya, where M-PESA is a private currency backed 1-1 by Kenyan shillings. And in Ecuador, where the government has been trying to launch a Central Bank digital currency. Any Ecuadorian over the age of 18 can open an account for free and transfer money to other people for free. 

An interesting aspect of this otherwise fairly straightforward value transfer system is that is denominated in US Dollars. The US Dollar has been legal tender in Ecuador since 2000, when the post-gold standard “Sucre” was abandoned although, apparently, the “centavo” coins are still in use. This is a practical solution to the big problem of small change under “dollarisation” and most countries that use the dollar still mint local coins: thus, Ecuador uses the dollar as legal tender but mints centavo coins. The government guarantees that anyone who wants to exchange 100 Ecuadorean centavos for a genuine United States dollar can do so. As the economist John Kay noted when he reflected on the coins in his pocket in Ecuador, is in itself an interesting comment on the subject of money. He also pointed out that there is a 50 cent coin minted for the government of Ecuador while the US does not issue 50 cent coins. So “while everyone in the Galápagos or the national capital Quito would accept my 50 cent coin, no one in Washington would”. He went on to note the curiosity that “genuine dollar coins, minted for the US Treasury, have not proved popular in the US but are widely circulated in Ecuador”. It is important to understand that the US Federal Reserve banknotes that are in circulation in Ecuador, stuffed under mattresses in Ecuador and fuelling the less-formal sections of the Ecuadorian economy are in essence an interest-free loan to Uncle Sam. By replacing these with digital currency, the Ecuadorian central bank can reclaim the seigniorage for itself.

All well and good and the ability to transact electronically will also be of the great benefit to the citizens and should cut transaction costs across the economy. If the central bank were to ask the advice of people with knowledge of the creation of a national non-bank mobile payment system (e.g., my colleagues at Consult Hyperion) I am sure that they would be advised to make the system a platform for innovation to encourage entrepreneurs to build local solutions on top of it. The lack of APIs in the initial roll-out of M-PESA was, in hindsight, a mistake and Ecuador could clearly learn from this to capture even more benefits from its transition to digital currency.

Ecuador Demo

 

Unreal Money.

The Ecuadorian Digital Dollar has, I have to say, not been universally well-received. A suggestion for governments thinking of introducing such a system in the future is that it  would benefit greatly from transparent auditing as citizens will not hold the electronic currency unless they are sure that it will remain redeemable at par for US dollars (or other basket of currencies or commodities) themselves. Any suspicion of fractional reserve is disastrous. If the government were to fall prey to the temptation to put more of the digital dollars in circulation than they have (or have the equivalent of) in reserve then, as the Wall Street Journal observed at the time of launch, they will simply be creating doomed electronic assignats that will never obtain traction in the wider economy and Ecuador will be unable to reap the many benefits of its transition away from cash. Christine makes this point herself, saying that the issuing of such a digital currency could be “fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a ‘smart rule’ that might reflect changing macroeconomic circumstances”. I agree strongly: the use of shared ledgers and other such technology may be of maximum benefit in delivering the robustness and availability that a national cash replacement system and the radical transparency that it is required to give people faith in the system.

P.S. In case you see any tweets, newspaper comment or learned articles that refer to the Ecuadorean digital experiment in monetary futures as a “cryptocurrency” please bear in mind that it isn’t.

They are where the money isn’t

When most of us think about bank robbery, we think about people inventing complex derivates and amassing fortunes while the institutions that house them amass fine, bankruptcies and bailouts. But it turns out that your grandparent’s bank robberies are coming back into fashion. American Banker says that violent bank crime has become increasingly less common in the past decade, but that the rate of robberies has ticked back up in recent years.

At first I thought this might be a hipster revolt, like with vinyl records, but that doesn’t seem to be the case. So I’ve no idea. I don’t understand bank robbery. I remember getting into an interesting discussion about bank robbery at a lunch a while back. We were talking about risk and risk analysis. I was trying to make some points about why proper risk analysis like this is a more cost-effective way to proceed than (for example) panicking about newspaper stories on hacking, and that led to a train of thought around cost-benefit analysis for the robber, not the bank. Are robbers put off by thick doors and barred windows and such like? Are robbers deterred by visible, physical symbols of security? Come to that, should be bother with physical security at all in banks?

This is a fair point. So it set me thinking: if you are an amoral sociopath desperate to amass as much money as possible, are you better off robbing a bank or working for it? As a responsible father, I want to help my sons chart the best course for life. Right now, they are at University studying socially useful subjects in science and engineering. Having myself studied science only to become trapped in mortgage serfdom and forced to work until I drop, I am trying to persuade them to become Somali pirates or Wolves of Wall Street, without much success so far. So I understand that side of the equation, but am less certain of the other. Remember that old paper “The Decision-Making Practices of Armed Robbers” by Morrison and O’Donnell. It’s a study of armed robbery in London and one of my favourite papers. It is based on first-hand research (viz, the analysis of over 1,000 police reports and interviews with 88 incarcerated armed robbers).

While it’s about the UK rather than the US, I’m sure the thought processes of the perpetrators must have some similarities. Crucially, the paper notes that “almost all of these robbers evaluated the offence as having been financially worthwhile (aside from the fact that they were eventually caught and punished for their crime)”. So robbing a bank seems like good idea, if you exclude the possibility (in fact, the likelihood) of being caught. I suppose this is standard Jordan Belfort, Bernie Madoff thinking thought isn’t it? Unless people believe they will be caught (and these people don’t) then they only consider the upside.

(One of the interesting snippets it contains is that a great many of the armed robbers in the UK use imitation firearms even though they could have access to real ones. I imagine that in the US the use of imitations is vastly less prevalent, since it’s presumably harder to buy an imitation gun than a real one there.)

So, what to do? While glancing back over the paper I note that the authors say that it doesn’t seem practical to “expect financial institutions and commercial properties to reduce counter cash much more than they already have”. That may have been true when the paper was written a few years ago, but it clearly isn’t true now, since both bank branches and businesses in many countries are becoming cash free. And this is a good thing, because as we all know there is a direct and measurable relationship between the amount of cash out there (more on this later) and the amount of crime. As the paper says, “even when the amount of money obtained was quite small (an element often touted in support of the irrationality of economic criminals), it must be recognised that even apparently small sums may be adequate for the offender’s immediate needs. Hence, gains may be subjectively much larger than they appear”.

Bank robber or management consultant?

 

It’s a stick up

The rewards of armed robbery seem to me, then, as an educated middle-class professional, to be rather low. Yet they are still sufficient to attract the robbers, because their needs are immediate and limited. I want a holiday home in the South of France but the guy in the Nixon mask isn’t robbing a bank to pay his way through college or to obtain seed finance for a start up, he just needs to buy a car or some drugs or whatever. This paper seems, then, to indicate that so long as there is some cash in the till, there will be robberies. This is not an observation confined to banking. A study of the American Electronic Benefit Transfer (EBT) program found that “the EBT program had a negative and significant effect on the overall crime rate as well as burglary, assault, and larceny”.

What they are talking about here are US programmes where benefit recipients are paid electronically and given cards that they can use in shops instead of being given cash. The authors found a 10% drop in crime correlated with the switch to EBT. It seems pretty overwhelming evidence, and even more so if you read the paper, which notes no impact on crimes that do not involve the acquisition of cash. If we can to stop armed robberies, that would surely be an excellent social benefit to the move to cashlessness and would help us to explain the nature of appropriate regulation to legislators.

But back to the specific point about the relationship between bank cash and robberies. With the rewards from robbing banks and businesses falling  armed robbers, like everyone else, follow the money – literally – and so cash-in-transit (CIT) robberies are now the preferred option. We see the same in Europe where countries that have much higher usage of ATMs have much higher CIT robbery rates than countries that have lower ATM usage (see, for example, Sweden and Denmark).

Overall, then, we see another early indication of the emerging post-cash era: Spending on physical bank security is being reduced and spending on virtual bank security is being increased. We do, indeed, live in interesting times.

Central bank digital currency again

Greg Medcraft, the Chair of the Australian Securities and Investment Commission, recently said that “traditional” bank current accounts may disappear in the next decade because central banks will create digital currencies and provide payment accounts to customers directly (Australian Financial Review, 3rd September 2017). This is a topic that I examined in some detail in my recent book, Before Babylon, Beyond Bitcoin. Did I mention that I have a new book out, by the way? This is what the noted British magazine Prospect said about it:

When a book comes along with glowing praise on its sleeve from Kenneth Rogoff and an introduction by Andrew Haldane, Chief Economist at the Bank of England, you know you’ve got something hot on your hands. This analysis of money by one of the world’s leading experts on the subject does not disappoint…

Birch is brilliant at bringing together these disparate historical strands, through the birth of the great European trading centres, up to the present day. The central insight of all this is that money is essentially a technology, just like any other and that technologies change—and improve—over time. In other words, money is not fixed. And it is certainly not just coins and notes.

And what of the future of money—will it be characterised by a drive towards a small number of unified currencies, or towards a multitude? Birch opts for the latter. In future, communities will develop their own stores of value, Birch says, independent of governments and central banks. The growing popularity of crypto-currencies such as Bitcoin suggests that he may have as good a handle on the future as he does on the past.

From What actually is money? A new book examines early civilisations to find out | Prospect Magazine

As you will deduce from this, I think that the way that money works now is, essentially, a blip. It’s a temporary institutional arrangement and it must necessity change as technology, business and society change. These sentiments are not restricted to technological determinists of my ilk. As the former governor of the Bank Of England, Mervyn King, wrote in his book The End of Alchemy”, although central banks have matured, they have not yet reached old age. But their extinction cannot be ruled out altogether. Societies were managed without central banks in the past”. I was reminded of this when I listened to the excellent London FinTech Podcast series produced by my good friend Mike Baliman. In Episode 85 “The Nature of Money, Economic Imbalances & will Central Bank Digital Cash alleviate them?” which Mike made with David Clarke of Positive Money, the idea of central bank digital currency is discussed in some detail. While I understand the reasons why a digital currency is attractive to a central bank (and there are many of them) I’m not convinced that in the long run central banks will retain any sort of monopoly over digital currency. And if they don’t have a monopoly, what can they do to keep the value of their money up and therefore attractive as a store of value?

 I had to think about this sort of thing in some detail when the kind people from Amsterdam Institute of Finance (AIF) and the Dutch central bank (Die Nederlandsche Bank, DNB) invited me to Amsterdam to launch my book in their fair city, so I took the opportunity to run through the “5Cs” model of money issuing from the book and take questions from a very well-informed audience.

DNB_Amsterdam

 

One of the points that I made was that technology is no longer a barrier. The idea of the DNB running something like M-PESA but for Dutch residents is hardly far fetched. There are 26 million M-PESA users in Kenya (as of 2Q17) and Facebook can manage a couple of billion accounts, so I’m sure that DNB could download an app from somewhere to run a few million accounts for the Netherlands. There is a middle way though. The central bank could create the digital currency but it could still distribute it through commercial banks. The commercial banks would not be able to create money as they do now (only the central bank would be able to do this) but they would use their existing systems to manage it. Yao Qian, from the technology department of People’s Bank of China, wrote about this earlier this year.

“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.”

PBOC Researcher: Can Cryptocurrency & Central Banks Coexist? – Bitcoin Magnates

We had a go at this sort of thing a couple of decades ago with Mondex and its ilk in the first attempts to get bank-issued electronic cash into the mass market. Those efforts failed for a number of reasons but primarily because of a lack of acceptance. It was easy to give people cards but hard to give people terminals. That’s all changed now. M-PESA doesn’t use cards and terminals, it uses mobile phones. I’m sure that when future historians write about the evolution of money, they will see that the mobile phone, not the plastic card, was the nail in the coffin of cash. But back to the point, which is… why bother? What if the Chair of the Australian Securities and Investment Commission is right? Why bother with the commercial banks in this context? Now we are clear about the differences between cryptocurrency and a digital currency, let’s review a few of the key issues:

  • A monetary regime with central bank-issued national digital currency (i.e., digital fiat) has never existed anywhere, a major reason being that the technology to make it feasible and resilient has until now not been available. But now technology is available, and we should use it.

  • The monetary aspects of private digital currencies (a competing currency with an exogenous predetermined money supply) may be seen as undesirable from the perspective of policymakers. Also, as I have mentioned before, the phrase “digital currency” is perhaps a regrettable one as it may invite a number of misunderstandings among casual readers.

  • Digital fiat means a central bank granting universal, electronic, 24 x 7, national currency denominated and interest-bearing access to its balance sheet.

  • The cheapest alternative for running such a system would clearly be a fully centralised architecture like M-PESA but there may be other reasons for want to use some form of shared ledger implementation instead (e.g., resilience).

  • A feature of such a shared ledger system is that the entire history of transactions is available to all verifiers and potentially to the public at large in real time. It would therefore provide vastly more data to policymakers including the ability to observe the response of the economy to shock sort of policy changes almost immediately.

Were we to decide to create a new central bank digital currency issued and managed by commercial banks (let’s call it Brit-PESA) now, of course, we wouldn’t use the basic SIM toolkit and SMS technology of M-PESA. We’d use chat bots and AI and biometrics and voice recognition and all that jazz. I don’t think it would that difficult or that complicated: there would be a system shared by the commercial banks with the funds held in a central account.

There’s a very good reason for doing so. I’m sure you’re all familiar with the Bank of England Staff Working Paper No. 605 by John Barrdear and Michael Kumhof, “The macroeconomics of central bank issued digital currencies”. It says (amongst other things) that 

…we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

Did you see that? Permanently raise GDP by as much as 3%. Scatchamagowza. Permanently raise GDP by as much as 3%. Why aren’t we doing it right now! Let’s draw a line under the money of the past and focus on the money of the future. Talking of which, back to my presentation at DNB.

dnb slide

Whether digital fiat is the long term future of money or not (and I think it isn’t), let’s get on with it, whether Brit-PESA or Brit-Ledger or Brit-Dex, and give everyone access to payment accounts without credit risk.  And there’s another reason, beyond GDP growth, for doing so. Writing in the Bank of England’s “Bank Underground” blog, Simon Scorer from the Digital Currencies Division makes a number of very interesting points about the requirement for some form of digital fiat. He remarks on the transition from dumb money to smart money, and the consequent potential for the implementation of digital fiat to become a platform for innovation (something I strongly agree with), saying that:

Other possible areas of innovation relate to the potential programmability of payments; for instance, it might be possible to automate some tax payments (e.g. when buying a coffee, the net amount could be paid directly to the coffee shop, with a 20% VAT payment routed directly to HMRC), or parents may be able to set limits on their children’s spending or restrict them to trusted stores or websites.

From Beyond blockchain: what are the technology requirements for a Central Bank Digital Currency? – Bank Underground

If digital fiat were to be managed via some form of shared ledger, then Simon’s insight here suggests that it is not the shared ledger but the shared ledger applications (what some people still, annoyingly, insist on calling “smart contracts”) that will become the nexus for radical innovation.

Bitcoin isn’t the future of money, but tokens might well be

The noted cryptocurrency investor Brock Pierce was responsible for the first Initial Coin Offering (ICO) of its kind (which was MasterCoin) back in 2013 and he is an investor in a great many companies in the space via Blockchain Capital. He’s a serial entrepreneur with a track record going back many years. He knows about investing in a way that I very much do not. Listen to what he says about the impact of ICOs.

I think what I’ve done is the end of all VC, all private equity, all rates because these are industries that are illiquid… I think the Sequoias of the world will go out of business. I think all the big VCs are done.

From The Wizard Behind the ICO’s Transforming VC

Wow. That sounds like a pretty astonishing claim, hubris verging on the delusional. But the thing is… I think he may be right. To see why, you need to think about the money of the future. In his book “The Money Trap”, Robert Pringle (a former editor of that well-known revolutionary pamphlet “The Banker“) writes that at the turn of the millenium “globalization reached the limits compatible with existing international monetary arrangements”. I could not agree more. There is pressure for change and I think the current cryptomania gives us a window into the future of money. But as I have written many times before, the future of money is not Bitcoin and Bitcoin is not the future of money.

Now I accept that with the price of Bitcoin around $4000 and still climbing, that seems like a brave statement. But Bitcoin $4000 doesn’t mean anything. How do you figure out what Bitcoin is worth? From the market? On the one hand I read that this opaque marketplace is being manipulated but on the other hand I read that Bitcoins will be worth like $1 billion each or something (which makes it all the more puzzling why merchants bother with Bitcoin acceptance, since no sane shopper would spend Bitcoins instead dollars if they are going to go up a thousandfold in the next few years). In the long term, for Bitcoins to be worth something, someone has to want them for some reason. What will they want them for? Shopping? It’s too slow, it was never designed for real time payments. Money laundering? Bitcoin isn’t anonymous enough for mass market criminals (as the FBI guys who stole coins during the “Silk Road” investigation and that BTC-e guy who got arrested in Greece have discovered).  No, I don’t think uncensorability is going to be a good enough business to sustain Bitcoin. The Wannacry ransomware scallywags swapped their Bitcoins for anonymous Monero as soon as they could get them out of their wallets. Bitcoin will, in time, be superseded in these markets by truly anonymous digital money.

If not Bitcoin, then what? Of course, it’s entirely possible that while Bitcoin and other cryptocurrencies may not be the money of the future, they may be the platform for money of the future and I think can erect an intellectual scaffolding to support this claim even if I cannot architect the financial institution of the future that it will be used to build. In my book “Before Babylon, Beyond Bitcoin”, I explore the notion of private money set out by the noted Maltese “lateral thinker” Dr. Edward de Bono. He wrote a pamphlet called “The IBM Dollar” for the Centre for the Study of Financial Innovation (CSFI) back in the early 1990s, in which he rather memorably remarked that he looked forward to a time when “the successors to Bill Gates will have put the successors to Alan Greenspan out of business”. (It was reprinted in David Boyle’s superb book “The Money Changers” in 2002 and you can read it online here at Google Books.)

Dr. de Bono was arguing that companies could raise money just as governments now do — by creating it from thin air. Now, if that notion seems to have resonance Mr. Pierce and his ICOs then, well… yes, that’s my point. Lots of companies are doing just that and they are raising literacy billions of dollars doing so.

WOULD you like to invest in Filecoin, a marketplace for digital storage services? Or Indorse, a professional social network where members own their data? How about Lust, a service “to enable all human beings on Earth to find their perfect sexual partner anonymously?” These are just three of a wave of what are called initial coin offerings (ICOs)… What are they and why are they so successful?

From What are initial coin offerings? in The Economist (22nd August 2017).

The idea of private currency as a claim on products or services produced by the issuer caught my attention two decades back when I first worked on digital money and continues to inform my thinking. For one thing, it makes economic sense. IBM, in de Bono’s example, might issue “IBM Dollars” that would be redeemable for IBM products and services, but are also tradable for other companies’ monies or for other assets in a liquid market. Now, to make such a scheme work IBM would have to learn to manage the supply of money to ensure that the monetary base and its capacity to deliver are matched and that inflation does not destroy the value of their creations, but I’m sure they could get Watson to do that, so it is easy to imagine that such a system could work.

To Mr. Pierce’s point, this would mean a new kind of financial market. A start-up launches, and instead of issuing equity, it issues money that is redeemable against future services. So, for example, a distibuted file storage start-up might offer money in the form of megabyte days that are redeemable five years from now. In the early days, this money would trade at a significant discount to take account of the risks inherent in the venture. But once the file system is up and running and people like using it, then the value of the money will rise. With tens of millions such currencies in circulation, constantly being traded on futures, options and foreign exchange markets, it might sound as if the “money” would be unusable because transactions would be unbearably complex for people to deal with. But as I wrote in “The Financial Times“, that’s not the world that we will be living in. This is not about transactions between people but transactions between what Jaron Lanier called “economic avatars“. This is a world of transactions between my virtual me and your virtual me, the virtual Waitrose and the virtual HMRC. This is my machine-learning AI supercomputer robo-advisor, or more likely my mobile phone front end to such, communicating with your machine-learning AI supercomputer robo-advisor.

These robo-advisors will be entirely capable of negotiating between themselves to work out the deal. Dr. de Bono foresaw this in his pamphlet, writing that pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction… the same system could match demands and supplies of financial assets, determine prices and make settlements. He also wrote that the key to any such a system would be “the ability of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties”, an early vision of what we might now call the reputation economy that I explored in my previous book “Identity is the New Money”. Now, 

Now, two decades on from this description, we have a technology to implement and while the idea using cryptocurrencies as tokens linked to something in the real world  is hardly new (from the earliest days of Bitcoin people were using “coloured coins” to do this), token technology really took off with the development of the ERC-20 standard back in 2015. ERC-20 defined a way to create a standard form of token in a “smart contact” on the Ethereum blockchain. (Ignore the language here :  they are not smart and they are certainly not legal contracts, they are a special kind of application that executes on the blockchain). The use of these ERC-20 tokens to implement ICOs has exploded in recent months. Filecoin, the company that plans to monetise unused computer storage noted in the Economist article above, has just raised $50m+ in token pre-sales to Silicon Valley investors (including Sequoia Capital and Andreesen Horowitz) and another $200m in a public token sale. That came not long after Tezos, which is developing a blockchain competitor to Ethereum, raised $232 million and Bancor raised $153 million in three hours.

Despite these huge sums, there is a lot of uncertainty in the space. The Securities and Exchange Commission (SEC) ruled in July 2017 that certain kinds of tokens are in fact securities and that transactions must regulated. This was hardly unexpected and I certainly think that the ruling was good news. Yes it is causing some disruption right now (one of the largest exchanges, Bitfinex, has just suspended ERC-20 token used for ICOs from trading for US citizens) and yes some people will lose a lot of money and yes some people will end up in jail, but that’s what happens as we move from a Wild West to regulated growth and prosperity. The regulation of ICOs is important because ICOs are more of a picture of the money of the future than Bitcoin is.

As I said in Before Babylon, Beyond Blockchain, tokens may make a real difference to the way the economy works. When the current craziness is past and tokens become a regulated but wholly new kind of digital asset, a cross between corporate paper and a loyalty scheme, they will present an opportunity to remake markets in a new and better way. One might imagine a new version of London Alternative Investment Market (AIM) where start-ups launch but instead of issuing money they create claims on their future in the form of tokens. The trading of these tokens is indistinguishable from the trading of electronic cash (because they are bearer instruments with no clearing or settlement) but there will be an additional transparency in corporate affairs because aspects of the transactions are public. And while the company and observers may not know the beneficial owner of the tokens (because the wallets are identified only by keys), the market will be set up to issue wallets after appropriate KYC. In the general run of things, transactions are private but where there is suspicion of wrongdoing the ownership can be exposed under appropriate legal conditions. With reputations established as an immutable history of participation in transactions, good behaviour will not be gamed and bad behaviour will be on display. Market participants will be able to assess and manage risk, regulators will be able to look for patterns and connections. I’ll be able to see that your assets exceed your liabilities without necessarily being able to see what those assets or liabilities are.

The transparency obtained from using modern cryptography (e.g. homomorphic encryption and zero-knowledge proofs) in interesting ways, as an aside, is one of the reasons why I tend to think of the blockchain as a regtech, not a fintech. As Salome Parulava and I wrote in “Ambient Accountability: Shared Ledgers, Glass Banks and Radical Transparency in Financial Services” in just-published “Handbook of Blockchain, Digital Finance and Inclusion”, these “translucent transactions” mean that we will find ourselves in an era of ambient accountability, where the technological architecture means constant verification and validation instead of periodic auditing long after the trades and exchanges have taken place.  

This is a far more efficient way to manage a marketplace. There won’t be some giant IMF database that manages the new kinds of money. In this market, company perfomance rewards private money holders by improving the exchange rate against other private monies. No coupons and dividends, no clearing and settlement, no hiding the number of tokens out there. The cost of trading these tokens will be a fraction the cost of trading stocks and bonds, which is why liquidity will seep out of existing markets and into these new and more efficient structures. Stephen McKeon, a finance professor at the University of Oregon, summarises this imperative by saying that assets of all kinds will tokenise because they will lose the “liquidity premium” if they do not.

Tokens won’t only be issued by companies, of course. It seems to me that tokens that implement the values of communities (and, because they are “smart”, can enforce them) may come to dominate the transactional space (think of the Islamic e-Dinar and the London Groat). One such community might well be the nation state. In fact, at least one nation state is already thinking along these lines. Kaspar Korjus, the director of Estonia’s e-Residency program, has already floated the idea of issuing tokens instead of sovereign bonds.

Korjus said that the money raised in the offering could be used for a fund jointly managed by the government and outside private companies. This fund would be used to invest in new technologies for the public sector as well as invest venture capital into Estonian companies founded by both natives and e-Residents. Eventually Korjus sees the tokens holding value and being used as a payment method for public and private services both within the country and globally, which would provide a return on investment to ICO participants.

From This European country may hold an ICO and issue its own cryptocurrency – TechCrunch

This is, to my mind, the ultimate answer to “what is money”. Money is something that you can pay your taxes with! If Estonia were to go ahead in this way — merging, essentially, currency and bonds into a single, liquid, circulating digital asset —we will have gone full circle back to the days when government tally sticks were circulating in England. Every day, in every way, the future of money looks very much more like its past.