SHCs are sick, as the kids say

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

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

Wow.

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

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

  • One half US dollar,

  • Euro 18%,

  • Yen 14%,

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

  • Singapore Dollar, 7%.

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

  • 41.75% US dollar,

  • 30.93% Euro,

  • Yen 8.33%,

  • Sterling 8.09%, and…

  • Yuan, 10.92$%.

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

 Mondex Paraphanalia

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

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

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

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

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

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

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

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

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

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

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

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

Margaret Attwood, Kenneth Rogoff and William Gibson (and me)

A few years ago I was involved in a series of Twitter exchanges about the relationship between cash and anonymity that stimulated me to write a blog post on that topic and that debate (see “It doesn’t have to be the handmaid’s tale” from September 2016). Some more recent exchanges on the same topic made me think about revisiting and revising that post and exploring some of the ideas in further in light of recent discussions (eg, Libra and central bank digital currencies).

The root of these debates is, of course, that many in the Bitcoin community see Bitcoin’s sort-of-anonymity as an important characteristic because it defends the individual against state power and they berate me for wanting to replace cash “in circulation” with a digital alternative. Cash, they claim, is freedom, and they are correct about this: as cash is uncensorable, you have the freedom to buy what ever you want with it.

So should we replace cash with an anonymous cryptocurrency or digital currency? There are many people who I greatly respect who think the former. For example, in his presentation on ’The Zero Lower Bound and Anonymity”, Kocherlakota tends toward some form of cryptocurrency to replace fiat currency rather than a central bank digital currency and one of the reasons for this is his (entirely reasonable) concern about anonymity. This point is illustrated by a literary reference to Margaret Attwood’s “Handmaid’s Tale”, in which a theocratic American government (the “Republic of Gilead”) has taken away many of the rights that women currently enjoy. One of the tools that this government uses to control women is a ban on cash. In Gilead, all transactions now routed digitally through the “Compubank”.

The Handmaid's Tale

It was many, many years since I’d read “The Handmaid’s Tale” so I went to my bookshelf to dig it out and re-read that part. The narrator does indeed talk about how the evil junta in charge of that future America took over and says that it would have been harder if there had still been paper money. But the truth is, I don’t see how. North Korea has everyone using paper money and virtually no cards. Denmark has virtually no paper money and everyone uses cards (and phones). To be frank, in the modern world, I don’t think cash is that closely related to dictatorship.

The point I wanted to make here, though, is that it is wrong to present the only two alternatives as total surveillance and anonymity. I simply do not accept that the alternative to the unconditional anonymity of cash and the crime that goes with it is a dystopian, totalitarian nightmare. That’s only one way to design a circulating medium of exchange and it’s not the way that I would design it. I would opt for something along the lines of a universal pseudonymous mechanism capable of supporting an arbitrary number of currencies, a Mondex de nos jours, an M-PESA with go-faster stripes. In a world where there are completely, unconditionally anonymous payment mechanisms in widespread use there’s no way to stop very bad people from using them to do very bad things, so I’d prefer a world in which there are pseudonymous mechanisms that defend against routine surveillance and petty intrusion but allow societies legitimate interests to protect against crime.

Does this mean that anonymous mechanisms should be banned? Probably not, for the good reason that it would be impossible to do so. More likely would be a situation shown in the diagram below where there is an anonymous layer that has a pseudonymous layer on top of it and a absonymous (I made this word up) on top of that. People, governments and businesses would use the pseudonymous layer for the majority of transactions: the anonymous money would be useless for almost all transactions for almost all people since no-one would accept it. I would love to give this kind of anonymous money the generic name zerocash, after the William Gibson novel (“Count Zero”) in which one of my all-time favourite quotes about the future of money appears, a quote that more accurately describes the foreseeable future of payments than anything from IBM or the IMF:

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.

(Unfortunately, someone else had already beaten me to the name! See E. Ben-Sasson, A. Chiesa, C. Garman, M. Green,I. Miers, E. Tromer, and M. Virza, “Zerocash: Decentralized anonymous payments from bitcoin” in IEEE Symposium on Security and Privacy, SP 2014, Berkeley, CA, USA, May 18-21, 2014. IEEE Computer Society, pp.459–474 (2014). But I’ll stick to using the all lower-case zerocash to mean generic unconditionally anonymous electronic cash. The wallet that this electronic cash is stored in is an anonymous digital identity. It’s just a string of bits.)

Now, you could imagine some form of zerocash in circulation as a cash alternative but not accepted in polite society (i.e., any attempt to spend it would be regarded as prima facie evidence of money laundering and exchanges would be barred from handling it). Polite society instead decides to protect privacy through managed conditional anonymity, or pseudonymity. A pseudonymous currency that is managed by a central bank but where transactions take place on a distributed ledger is much more like “RSCoin”, the cryptocurrency that was proposed by George Danezis and Sarah Meiklejohn at UCL [Danzis, G. and S. Meiklejohn. “Centrally Banked Cryptocurrencies”, NDSS ’16, 21-24 February 2016, San Diego, CA, USA] using Ben Laurie’s “mintettes” concept. By creating a pseudonym that is bound to the zerocash digital identity, we make it useful (provided that the binding is done by someone who trusted in the relevant transactional use cases).

Why bind it in this way? Well, there is the usual privacy paradox to be dealt with here: I want my transactions to be anonymous, but everyone else’s to be not anonymous in case they turn out to be criminals. I cannot see any way round this other than pseudonymity. There are people out there (e.g., my colleagues at Consult Hyperion) that know how to design systems that work like this, so there’s nothing stop the FATF, Bank of England, or Barclays or anyone else from starting to design the future, privacy-enhancing electronic money system that we need.

In the real world, as the discussions around Facebook’s proposed “Libra” digital currency have shown, regulators will never allow zerocash. In fact, in the light of the recent FATF rules about identification for cryptocurrency transfers, they will not allow any form of transaction that does not provide full details of counterparties. They might, however, as I have suggested many times before, be prepared to allow some form of pseudonymous alternative provided that we can bind the pseudonym to real-world legal entity through trusted institutions.

Bank are of course a good place to form and maintain this binding, since they’ve already done the KYC and know who I am. So I give present my pseudonym to them and they can bind it to my “real” name to form a nym. In the example below, Barclays know who I really am, and I can present my Barclays nym where needed, but most transactions with counterparties take place at the pseudonymous layer and I can present my Vodafone pseudonym “Neuromancer” there if I want to. My counterparty doesn’t know that I am Dave Birch, only that Vodafone know who (and presumably, where) I am. For the overwhelming majority of day-to-day transactions, this is more than adequate. This layered approach (show below) seems to me a viable vision of a working infrastructure. Few transactions in the top layer (for privacy), most transactions in the middle layer, few transactions at the lower layer.

Layered model of cryptomarkets

So in this made-up example, Barclays know my “real” identity and Vodafone knows a persistent pseudonym tied to my phone number. (Of course, I could go to Barclays and choose to bind my Vodafone identity to my Barclays identity, but we don’t need to think about this sort of thing here.) I’m going to reflect on how these bindings might work in practice more in the future, but for now I want to circle back to that opening concern about losing the anonymity of cash. Here’s another version of that meme that I read in Reason magazine (“Cash means freedom”) a while back: “Cash—the familiar, anonymous paper money and metallic coins that most of us grew up using—isn’t just convenient, it’s also a powerful shield for our autonomy and our privacy”

But it really isn’t. Your privacy is being taken away because of social media, people wearing cam-shades and ubiquitous drones, not because of debit cards. And none of this has anything to do with dictatorship. I wouldn’t want to live in the America of the “The Handmaid’s Tale” whether it had anonymous payments or not. I understand the concerns of those concerned with privacy (as I am) that there might be an inevitable tendency for a government to want to trespass on the pseudonymous infrastructure in the name of money laundering or terrorism, but that’s a problem that needs to be dealt with by society, not by technology.

Look, I think we should start to consigning cash to the dustbin of history, beginning with the $100 bill, the £50 note and that affront to law-abiding people everywhere, the Swiss 1,000 franc note. There are an increasing number of people coming around to my way of thinking, including the former chief economist to the International Monetary Fund (IMF) Kenneth Rogoff, who in his book “The Curse of Cash” argued that large value banknotes should be withdrawn not only because of their use in criminal endeavours but because they prevent central banks from using their full range of monetary policy tools. If we are going to start getting rid of cash though, we need to come up with alternatives the provide levels of privacy and security determined by society as a whole, not by a few engineers.

Digital identity in the UK – Will big banks or big techs deliver it?

The opening keynote at this year’s London Identity Week was given by Oliver Dowden, the Minister for Implementation at the Cabinet Office. Mr. Dowden is the Minister in charge of the digital transformation of government. To people like me, digital identity is central to digital transformation of government (and the digital transformation of everything else, for that matter) so I was looking forward to hearing the UK government’s vision for digital identity.  In his keynote, the Minister said that the UK is seen as being at the cutting edge of digital identity and that GOV.UK Verify is at the heart of that success. 

(On 9th October 2016, Mr. Dowden gave written statement HCWS978 to Parliament, announcing that the government was going to stop funding GOV.UK Verify after 18 months with the private sector responsible for funding after that.)

Right now you can’t use a GOV.UK Verify identity provider to log into your bank or any other private sector service provider. But in his speech the Minister said that he looks forward to a time when people can use a single login to “access their state pension and the savings account”. This, in my opinion, is quite distinct from the single identifier that the Parliamentary Select Committee on Science and Technology called for in their report this week. The Right Honourable Norman Lamb MP, Chair of the Committee, observing that “the current digital service offered by the Government has lost momentum” called for the introduction of a single unique identifier for access to public services.

 

I have to say that I sort of agree with the Science and Technology Committee on the efficient delivery of public services as well as what the Minister said about a single login across both public and private services. Obviously you’d want the same login scheme but a different persona (an identifier plus credentials) for pensions, pornography and other purchases, but that’s a another issue and not the focus on this discussion.

Identity Week Minister

Back to the Minister’s point though. Yes, it would be nice to have some sort of ID app on my phone (I happen to sit on the advisory board of Biid, who provide just such an app) and it would be great if my bank and Her Majesty’s Revenue and Customs (HMRC) and Woking Council and LinkedIn would all let me log in with this ID. The interesting question is who will provide such a login given that the government does not seem able to. Put a pin in that and we’ll return to it later. Meanwhile, back to the Minister, who made three substantive points in his speech. He talked about:

  • The creation of a new Digital Identity Unit, which is a collaboration between DCMS and Cabinet Office. The Unit will help foster co-operation between the public and private sector, ensure the adoption of interoperable standards, specification and schemes, and deliver on the outcome of the consultation.

  • A consultation to be issued in the coming weeks on how to deliver the effective organisation of the digital identity market. Through this consultation the government will work with industry, particularly with sectors who have frequent user identity interactions, to ensure interoperable ‘rules of the road’ for identity. To me, this sounds like a call for a trust framework of some kind but the Minister did not use those words.

  • The start of engagement on the commercial framework for consuming digital identities from the private sector for the period from April 2020 to ensure the continued delivery of public services. The Government Digital Service will continue to ensure alignment of commercial models that are adopted by the developing identity market to build a flourishing ecosystem that delivers value for everyone.

The Minister had a tight schedule was therefore unable to stay for my subsequent speech. I suggested that the idea of a general-purpose digital identity might be ambitious and a preferable strategy might be to look at who else could deliver the “digital identities from the private sector” used for the delivery of public services, which means delivering inclusive identity services with appropriate security at population scale. Perhaps DCMS has ensured that the UK taken a lead in this respect since, according to Sky News, “thanks to its ill-conceived porn block, the government has quietly blundered into the creation of a digital passport – then outsourced its development to private firms”. One of these firms runs the world’s largest pornography site, Pornhub, so I imagine they know a thing or two about population-scale identity management.

Identity Week Keynote

Assuming that the GOV.UK Verify identities fail to gain traction in the private sector, then I think there are two obvious private sector coalitions that might step in to do this for the government: the big banks and the big techs.

Big Banks

For a variety of reasons, I hope that the big banks are able to come together to  respond to the comments of Mark Carney, the Governor of the Bank of England, on the necessity for a digital identity in the finance sector to work with the banks to develop some sort of financial services passport. I made some practical suggestions about this earlier in the year and have continued to discuss the concept with potential stakeholders. I think it stacks up, but we’ll have to see how things develop. 

The reason why I’m so keen on this approach is that banks already do the hard work of establishing customer identities for know-your-customer (KYC) purposes but they don’t then do anything with it. So identity is a cost centre, when there is an opportunity for it to be a platform for new products and services. I’m not the only person who thought that the DCMS age verification legislation would be the trigger for a sophisticated federated privacy-enhancing bank-centric ID.

Modifications to open banking could allow bank customers to share data on their identity and their date of birth with third parties in a double-blind way that stops their bank from knowing the site they want to visit, or the site they’re visiting from knowing their identity.

From Don’t let the government’s porn block create a monopoly – 1828.

Well, whether it’s used for age verification or a pensions dashboard, I would have thought that what the European Commission Expert Group on Electronic Identification and Remote KYC Processes calls an “attribute-based LoA-rated KYC framework for the financial sector (ie, a financial services passport) would make a perfect post-Brexit stake-in-the-ground initiative to define the new era by boosting efficiency in the crucial Big Bank sector as well as providing a platform for new products and services for the Big Techs to develop. Talking of which…

Big Techs

I had the good fortune to attend more recent breakfast session with the Minister organised by the Cicero PR people. I have to say that the subject of digital identity came up more than once. There was considerable discussion (under the Chatham House rule) of both the priority of a UK digital identity infrastructure and the means by which it might come into existence. While I voiced my usual opinion that it should be the banks taking the lead, there were other people talking about alternative private sector providers.

It is clear, then, that if the banks can’t get it together then the big techs will  come knocking on the government’s door. I’ll readily admit that when the Minister said “private sector identities” in his speech, the first thought to flash across my brain was “Apple”. The public,  as well has civil servants in other departments who don’t really know or care about digital ID might be saying to themselves, “why can’t we just use ‘sign in with Apple’ to do our taxes?”, and this is a good point. Even if they are not saying it right now, they’ll be saying it soon as they get used to Apple’s mandate that all iOS apps that allow third-party sign-in must support it.

How would you use your Apple ID to log into HMRC? Easy: you log in as you do now after sending off for the password and waiting for it to come in the post and that sort of thing and then once you are connected tell them the Apple ID that you want to use in the future. If you want to be “jackdaniels@me.com” or whatever, it doesn’t matter. It’s just an identifier for the Revenue to recognise you. Then next time you go to log in to the Revenue, you log in as jackdaniels@me.com, something pops up on your iPhone and you put your thumb on it or look at it, and bingo you are logged in to fill out your PAYE without ever having to remember your taxpayer ID or government gateway passport ever again.

 

Incidentally, you could use this to log in at Pornhub too, because Apple have implemented a form of the persistent pseudonymity that I have long advocated as the core of a practical “privacy settlement”. So, as Wired magazine puts it, Apple’s universal login will let you hide your email address from third-party services. Unlike Facebook, Google and other services, Apple will randomly generate an email address on your behalf, and it then forward communications from the services that you sign up to on to your actual Apple ID address. I’m not joking about Apple delivering an infrastructure for the mass market instead of the government, it’s just that I thought that our forward-thinking innovation-centric banks would be the people to build on it. A couple of years ago I asked “Why doesn’t my bank put a token in my Apple Pay that doesn’t disclose my name or any other personal information… Keep my real identity safe in the vault, give me blank card to top shopping with”

The banks have a chance to to do this if the government, the Bank of England and industry bodies get together and work with them on it. But I wouldn’t be at all surprised to go over to the HMRC web site fairly soon to see “log in with Amazon” and “log in with Apple” next a button with some incomprehensible waffle about eIDAS that I, and most other normal consumers I’m sure, will simply ignore.

Break them up? No, open them up!

The Paris FinTech Forum this year was a superb event. I take my hat off to Laurent Nizri for pulling it all together and especially for his terrific first day panel with Christine Lagarde (who is Managing Director of the IMF and is therefore the woman in charge of money), Stefan Ingves (the governor of the Bank of Sweden), Carlos Torres Vila (Group Executive Chairman BBVA) and Kathryn Petralia (President of Kabbage) [video]. 

PFF Panel 1024

At one point, the conversation shifts to data. Carlos said that we should treat ownership of data as a human right, which I have to say I am not entirely sure about, and that “we should have regulation that forces data to flow” rather than the limited prescriptions of the 2nd Payment Services Directive (PSD2) “so that all sectors have to share their data, with consent, as banks have to do”.

(The reason that I’m not sure about the data ownership thing is that, as discussed in the MIT Technology Review recently, it may be a counterproductive way of thinking that “not only does not fix existing problems; it creates new ones”. Instead, was that article says, we need a framework that gives people the ability to stipulate how their data is used without requiring them to take ownership of it.)

That is a very interesting perspective on a very important issue.

What Carlos was talking about is the asymmetry at the heart of PSD2, an asymmetry that the regulators created and which if left to its own devices means an uncomfortable future for banks. I wrote about this back in 2017 for Wired, pointing out that the winner in this new environment will not be innovative startups across Europe but the people who already have all the data in world and can use data from the financial system to obtain even greater leverage from it. In other words, the GAFA-BAT data-industrial complex.

In Prospect (August 2018) there was a debate between Vince Cable, the former chief economist at Shell, and the economist John Kay. The issue was whether the internet giants should be broken up. Mr. Cable felt that the new data-industrial complexes (the DICs, as I call them, of course) need regulatory taming and that competition authorities should take a wider view of social welfare rather than focus solely on price, while Mr. Kay felt that regulators should focus elsewhere on higher priorities and let internet competition sort itself out. He has a point, because regulators have so far failed in this respect. As The Economist (Antitrust theatre, 21st July 2018) noted, despite headline grabbing fines and other antitrust actions, the European Commission has done little to strengthen competition.

So what to do? Do we sit back and allow the DICs to form unassailable oligarchies or should there be, as Carlos clearly thinks, a regulatory response? And if so, what response?

With Scott Galloway in DC.

Mr. Cable’s call for some form of regulatory response is hardly unique. Last year I had the honour of chairing Professor Scott Galloway at a conference in Washington, DC. Scott is the author of “The Four”, a book about the power of internet giants (specifically Google, Apple, Facebook and Amazon). In his speech, and his book, he sets out a convincing case for regulatory intervention to manage the power of these platform businesses. Just as the US government had to step in with the anti-trust act in the late 19th century and deal with AT&T in the late 20th century, so Scott argues that they will have to step in again to save capitalism. His argument centres on the breaking up of the internet giants, as Mr. Cable called for, but I cannot help but wonder if this is an already outdated response to changing economic dynamics in a world where data is the new oil (and personal data is the new toxic waste). Perhaps there is a post-industrial alternative to replace that industrial age regulatory recipe for healthy competition in a future capitalist framework. As Viktor Mayer-Schönberger and Thomas Range note in Foreign Affairs (A Big Choice for Big Tech, Sep. 2018), a better solution is a “progressive data sharing mandate”. They suggest sharing anonymised subsets of data to boost competition, but I think there might be an alternative.

The Banking Example

To see what this might look like, consider the example of the UK’s banking sector where regulation at both the UK and European levels has turned it into a laboratory for what is called “open banking”. Here, a “perfect storm” of the combination of the Competition and Markets Authority (CMA) “remedies”, the European Commission’s Second Payment Services Directive (PSD2) “XS2A” (weird euro-shorthand for access to accounts) provisions and the Treasury’s push for competition in retail banking mean that new business models, never mind new product and services, will be developed and explored here first.

(The rest of Europe will move to open banking in September 2019, when PSD2 comes into force, and other jurisdictions such as Australia are bringing in similar regimes — more on this later.)

Under the open banking regime, the banks are required by the regulator to install sockets in customer accounts so that anyone can plug in and access those accounts (with the customers’ permission, of course). Who knows what new businesses will be created by companies using these standard plugs to access your bank account? Who knows what new services will be delivered through the wires? It is an earthquake in the finance world and no-one can be completely sure as to what the competitive landscape will look like when the shocks have settled.

At the heart of the new regime, which began in January of this year, is the requirement for banks to implement these sockets, technically known as Application Programming Interfaces (APIs), for third-parties to obtain direct access to bank accounts. Just as apps on your smartphone can use map data through the Google Maps API or post to your Twitter stream using the Twitter API, open banking means that apps will be able to pull your statement out through an HSBC API and tell my bank to send money through a Barclays API.

Thus there is a genuinely new financial services environment coming into existence. But who will take maximum advantage of it? The incumbent banks or fintech startups? Financial services innovators or entrepreneurs who want to harness the banking infrastructure for social good? Customers taking control or challenger banks able to deliver better services to them?

I don’t think it’s any of these. Deutsche Bank Research published a note PSD 2, open banking and the value of personal data (June 2018) noting that while the new, free interfaces open up opportunities with respect to payment services, retail financing and other tailored products for fintechs who can “seamlessly attach their innovative services to the existing (banking) infrastructure”, there are others who can similarly take advantage. Retailers with a large customer bases, for example. And of course the internet giants and, somewhat surprisingly perhaps, the existing retail banks. As Deutsche Bank point out, the incumbents could also benefit and act as third-party providers “vis-à-vis other account servicing banks” and offer an array of new or extended services to their customers, which will intensify competition among all providers.

IMG 2692My Barclays mobile app can now see all of my UK bank accounts.

We already see these responses out in the market. Deutsche Bank themselves have announced a project with IATA and there is great work being done by other incumbents (see for example, my Barclays mobile app) as well as challengers. Of particular interest I think is Starling Bank’s strategy to create a platform for new players. But… as I have said before, I think the regulators have made a miscalculation in their entirely laudable effort to increase competition in the banking sector. In brief, forcing the banks to open up their treasure trove of customer transaction data to third parties is not going to mean a thousand fintech flowers blooming, precisely because of the advantages it affords the incumbents vs. incomers. And while some big retailers will take advantage, the overall impact will be to tip the balance of power to a new, different and potentially more problematic oligarchy (to use Vince’s label).

What is going wrong?

Back in 2016, I said about the 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? As the Diane Coyle, Bennett Professor of Public Policy at the University of Cambridge, pointed out in the Financial Times a year ago (Digital platforms force a rethink in competition policy, 17th Aug. 2017), economies of scale and insurmountable network effects mean that it will be very difficult for fintech startups to obtain significant market traction when they are competing with these giants.

Now, of course, when I wrote about this last year for the Wired magazine Wired World in 2018, no-one paid any attention because I’m just some tech guy. But when someone like Ana Botin (Executive Chairman of Santander) started talking about it, the regulators, law makers and policy wonks began to sit up and pay notice. In the Financial Times earlier this year (Santander chair calls EU rules on payments unfair, 16th April 2018) she remarked on precisely that asymmetry in the new regulatory landscape. In short, the banks are required to open up their customer data to the internet giants but there is no reciprocal requirement for those giants to open up their customer data to the banks. Amazon gets Santander’s data, but Santander doesn’t get Amazon data. Therefore, as Ana (and many others) suspect, the banks will be pushed into being heavily regulated, low-margin pipes while the power and control of the giants will become entrenched (broadly speaking, the distribution of financial services has a better return on equity than the manufacturing of them).

It boils down to this: If Facebook can persuade me that it’s in my interest to give them access to my bank account, I can press the button to give it to them and that’s that. They can use the PSD2 APIs to get to my data. On the other hand, if a financial services provider can persuade me to give them access to my Facebook data… well, hard luck. Carlos said, rather elegantly, that one of the nice things about data as a resource is that it doesn’t get used up.

What is to be done?

Ms. Botin suggested that organisations holding the accounts of more than (for example) 50,000 people ought to be subject to some regulation to give API access to the consumer data. Not only banks, but everyone else should provide open APIs for access to customer data with the customer’s permission. This is what is being planned in Australia, where open banking is part of a wider approach to consumer data rights and there will indeed be a form of symmetry imposed by rules that prevent organisations from taking banking data without sharing their own data. If a social media company (for example) wants access to Australian’s banking data it must make its data available in a format determined by a Consumer Data Standards Body. (Note that these standards do not yet exist, and as I understand things the hope is that the industry will come forward with candidates.)

This sharing approach creates more of a level playing field by making it possible for banks to access the customer social graph but it would also encourage alternatives to services such as Instagram and Facebook to emerge. If I decide I like another chat service better than WhatApp but all of my friends are on WhatsApp, it will never get off the ground. On the other hand, if I can give it access to my WhatsApp contacts and messages then WhatsApp will have real competition.

This is approach would not stop Facebook and Google and the other from storing my data but it would stop them from hoarding it to the exclusion of competitors. As Jeni Tennison wrote for the ODI in June, a good outcome would be for “data portability to encourage and facilitate competition at a layer above these data stewards, amongst the applications that provide direct value to people”, just as the regulators hope customer-focused fintechs will do using the resource of data from the banks (who are, I think, a good example of data stewards). Making this data accessible via API would be an excellent way to obtain such an outcome.

It seems to me that this might kill two birds with one stone: it would make it easier for competitors to the internet giants to emerge and might lead to a creative rebalancing of the relationship between the financial sector and the internet sector. Instead of turning back to the 19th and 20th century anti-trust remedies against monopolies in railroads and steel and telecoms, perhaps open banking adumbrates a model for the 21st century anti-trust remedy against all oligopolies in data, relationships and reputation.

Friday thought experiment: Mac-PESA

I”m very wary of promulgating the “political correctness gone mad” meme, as it is so often a lazy reactionary knee-jerk response to changing times, but I could not resist tweeting about the news that a British police force launched an investigation after a man claimed he had been the victim of a “hate crime” when… a branch of the Post Office refused to accept his Scottish banknote. This incident has now indeed entered our official statistics as a hate crime.

Frankly, this is mental. Scottish banknotes are not legal tender, even in Scotland, as I have explained before. The Post Office is no more obliged to accept a Scottish Fiver than it is to accept Euros, gold or cowrie shells. The story did, however, cause me to reflect on what will happen when, post-Brexit, Scotland votes to leave the UK. Will Scotland then join the euro or create its own currency?

As supporters of Scottish independence insist, once Scotland becomes an independent country, it will be responsible for managing its currency in the same way that every other country that has its own currency is responsible for managing. But how should the Scots go about creating this currency? Surely messing around with notes and coins, other than for post-functional symbolic purposes, is a total waste of time and money.

A much better idea would be to go straight to the modern age and create Mac-PESA, which would be a digital money system rather like Kenya’s M-PESA with with a few crucial enhancements to take advantage of new technology. M-PESA, as a post on the Harvard Business School blog says, is “the protagonist in a tale of global prosperity to which we all can look for lessons on the impact of market-creating innovations”, going on to say that its “roots are far more humble”. They are indeed, and if you are interested in learning more about them, I wrote a detailed post about the origins of M-PESA (and Consult Hyperion’s role in the shaping of this amazing scheme) and the success factors.

The most important of these was the role of regulator: the Central Bank of Kenya (CBK) didn’t ban it. Conversely, one of the reason for the slow take-up of mobile payments (and the related slow improvement in financial inclusion) in other countries was the regulators’ insistence that banks be involved in the development and delivery of mobile payment schemes. The results were predictable. (Here’s a post from a few years ago looking at the situation in India, for example).

Anyway, back to M-PESA. It is an amazing success. But it is not perfect. In recent times it has gone down, leaving millions of customers unable to receive or send money. These failures cost the economy significant sums (billions of shillings), which not not surprising when you remember that M-PESA moves around 16 billion Kenyan shillings per day. So when it drops out, it leaves customers hanging, it leaves agents losing revenue and it leaves the banks unable to transact.

It is now vital national infrastructure, just as Mac-PESA would be.

So what if there were no system in the middle to go down any more? What if the telco, regulator and banks were to co-operate on a Enterprise Shared Ledger (ESL) solution where the nodes all have a copy of the ledger and take part in a consensus process to commit transactions to that ledger?

Do the math, as our American cousins say. Suppose there are 10,000 agents across Scotland with 100 “super agents” (network aggregators) managing 100 agents each. Suppose there are 10m customers (there are currently around 20m in Kenya, which has ten times the population of Scotland). Suppose a customer’s Mac-PESA balance and associated flags/status are 100 bytes.

So that’s 10^2 bytes * 10^6 customers, which is 10^8 bytes, or 10^5 kilobytes or 10^2 megabytes. In computer terms, this is nothing. 100Mbytes? My phone can store multiples of this, no problem.

In other other words, you could imagine a distributed Mac-PESA where every agent could store every balance. You could even imagine, thanks to the miracles of homomorphic encryption, that every agent’s node could store every customers’ balance without actually being able to read those balances. So when Alice sends Bob 10 Thistles (the currency of the independent Scotland), Alice connect to any agent node (the phone would have a random list of agents – if it can’t connect to one, it just connects to another) which then decrements her encrypted balance by 10 and increments Bob’s encrypted balance by 10, then sends the transaction off into the network so that everyone’s ledger gets updated.

You can have a 24/7 365 scheme without having a Mac-PESA system in the middle. When you make a transaction with your handset, it gets routed to a superagent who decrements your balance, increments your payee’s balance, and then transmits the new balances (all digitally-signed of course) to the other superagents.

 

It would be a bit like making an ATM network where every ATM knows the balance of every debit card. No switch or authorisation server to go down. And if an ATM goes down, so what? When it comes back up, it can resynch itself.

So please, someone challenge me on this. As a thought experiment, why not have Scotland grab a world-leading position by shifting to a Central Bank Digital Currency (CBDC) based on a shared ledger. I very much agree with the Bank of England’s view of such a thing, which is that the real innovation might come from the programmability of such a currency. This would be money with apps and an API, and I would hope that innovators across Scotland and beyond would use it create great new products and services.

Brexit, Dr. Who and Digital Identity

You are probably all sick of reading, hearing and dreaming about Brexit by now and I certainly do not propose to comment on whether no deal is better than a bad deal or whether the blockchain can create a virtual hard border for Northern Ireland, but there is one potential implication of Brexit that I do want to flag up here for discussion. Brexit may restart the discussion about ID cards.

To give just one instance of this meme, The Independent looked at a report from the think-tank Policy Exchange and said that “the UK should consider introducing ID cards after Brexit… it argues that Brexit marks a natural point at which to reform the UK’s immigration system”.

(The think tank Global Future went even further, saying that “the introduction of electronic identity cards would address many voters’ concerns about immigration without the need for Brexit.)

The Policy Exchange report was written by David Goodhart and Richard Norrie, and what they actually called for in the report is the creation of (essentially) a population register, giving everyone a unique number to facilitate interaction with the state. They say explicitly that the system “should not require a physical ID card, let alone the obligation to carry one”. In that newspaper article on the report, David goes on to say that they want to reopen the debate about ID management to “reassure people that we know who is in the country, for how long, and what their entitlements are”. It’s my emphasis on that word “entitlements”, and I’ll come back to it in a moment.

I wrote an article about identity cards for David when he was the editor of Prospect magazine, way back in 2005, in which I said that some form of citizen register “is clearly a good idea”. I wrote another article for him back in 2007, in which I said that the (then Labour) government should radically rethink its ID scheme, moving away from the obsession with ID cards and “focus instead on allocating a unique national identity number, backed by biometrics, to each citizen—that is all that needs to be held in a national register”. Nobody listened to me (except David!) and I do not recall ever being consulted on the topic by the government.

Anyway, the point of my writing all those years ago (and I also covered the topic in my book Identity is the New Money in 2014) was to separate the register that is used to determine uniqueness from the scheme that is used to determine entitlements. I think my general point and about moving to entitlements and leaving personally-identifiable information (PII) out of transactions has been not only borne out but reinforced by GDPR and subsequent developments in the world of social media.

Brexit bootstrap

If Brexit means an opportunity to rethink at the national level, but this time involve some expert opinion, I’m all for it. As I have written before at tedious length, we do not need a national identity scheme, we need a national entitlement scheme. And now is the time to starting thinking about what it might look like. So here go. As David touches on with his comment, the real solution is to our 21st-century identity crisis not an Indian-style Aadhar identity number or a Chinese social score, but a general-purpose National Entitlement System (NES). Very few people reading either the Policy Exchange report or this blog will remember the long ago days before the last Labour government’s attempts to introduce a national identity card, but there was a time when there were consultations afoot around a much better idea, which was a national entitlement card. As my colleague Neil McEvoy and I pointed out in Consult Hyperion’s response to that consultation, the “card” is only one mechanism for storing and transporting entitlements and in the modern age there might be better ones, such as mobile phones for example, that can not only present credentials but, crucially, also validate them (a subject I will return to).

Suppose that the vision for national identity (based on the concepts of social graph, mobile authentication, pseudonyms and so on) focused on the entitlements rather than on either the transport mechanism or biographical details? Then, as a user of the scheme, I might have an entitlement to (for example) health care, Wetherspoons or access to the Wall Street Journal online. I might have these entitlements on my phone (so that’s the overwhelming majority of the population taken care of) or stored somewhere safe (eg, in my bank) or out on a blockchain somewhere. Remember, these entitlements would attest to my ability to do something: they would prove that I am entitled to do something (access the NHS, drink in the pub, read about Donald Trump), not who I am. They are about entitlement, not identity as a proxy for entitlement.

It can be done

A decade ago I set out a vision for a 21st-century identity card. I tried to make it a vision that the public and the government and journalists and think tanks and everyone else could understand. It was a vision with genuine innovation and potential that subsequent technological developments have served only to sharpen. I tried to build a narrative founded in mass media because that’s where MPs and their spads get their science and technology education from (they are all arts graduates, so their knowledge of STEM is limited). This led me to suggest that in this matter, as in so many other things, Dr. Who should be the guide.

Just as Motorola famously created the flip phone around the Star Trek communicator, I created a vision of an entitlement service around Dr. Who’s psychic paper. As any devotee of the BBC’s wonderful series knows, the psychic paper shows the “inspector” whatever it is that they need to see. If the border guard is looking for a British passport, the psychic paper looks like a British passport. If the customs officer on Alpha Centuri wants to see a Betelguesian quarantine certificate, the psychic paper looks like a Betelguesian quarantine certificate. It the bouncer is looking for a party invite (as shown in the picture below), the psychic paper looks like a party invite.

200806171440.jpg

Christopher Ecclestone flashes psychic paper.

(I remain completely serious using Dr. Who to frame the narrative. It may seem a little odd to base a major piece of national infrastructure on a children’s TV series, but as it turned out I was not the only person to look in this direction because the BBC fan forum the no-longer-online “Torchwood Think Tank” had the suggestion back in January 2007, noting “dialogue joke about wish fulfillment of Doctor Who’s Psychic I.D. card he flashes in Season 3, and how that’s the future of ID cards…”.)

We all grew up with Dr. Who, and the show engenders warm nostalgia. Now, obviously, there’s an age-related component to this. My favourite monsters were the cybermen and I always wanted to work for Brigadier-General Lethbridge-Stewart, so that gives my age away, but my kids enjoyed the show just as much and I’m sure the current generation are enjoying our new lady doctor just as much. Dr. Who is the perfect mechanism for explaining technology the public and to MPs and Ministers. However, “a national entitlement scheme” sounds a bit 1950s and a “psychic paper scheme” sounds too much like science-fiction, so I’ve decided to re-label it: welcome to the Brexit Bona Fides scheme.

Brexit bona fides

This is how the Brexit Bona Fides scheme works. Unlike Dr. Who’s psychic paper, this post-Brexit version of psychic paper only shows the viewer what he or she wants to see if the holder has the relevant credential. If you are trying to get into a nightclub, you need to prove to the bouncer that you are over 18. The bouncer is looking for a credential that proves you are over 18. You show your psychic paper to the bouncer and all it reveals to the bouncer is whether you are over 18 or not. All the bouncer sees is that you are old enough to drink. Provided you are over 18, of course. If you are not, the psychic paper remains blank, as shown below

nightclub

You cannot forge this credential because it is digitally-signed by the issuer. If a 16-year old copies an 18-year old’s certificate into their psychic paper, it won’t work, because the incoming messages will be encrypted using the 18-year old’s public key, but the 16-year old lacks the corresponding private key (which can’t be copied because it’s never given up by the psychic paper — sorry, iPhone secure element). Since transmitting the photograph and appropriate credentials directly into the brain of the nightclub bouncer isn’t possible, we will of course need to use some kind of clever communication device instead. Luckily, just such a device already exists: the mobile phone.

My mobile phone would be able to check the entitlements that it is allowed to when presented by your phone, so none of us would need special equipment. I show up with my phone and claim that I am entitled to vote: my phone presents a QR code that is read by the polling clerk’s phone which flashes up my picture if I am entitled to vote or a red cross if I am not. I walk up to Wetherspoons and the pub requests an IS_OVER_18 credential. My Apple Watch (or phone or whatever) presents a list of virtual identities that have such a credential digitally-signed by an authority acceptable to Wetherspoons (ie, one that they can sue if I’m under 18) and, assuming that I’ve chosen one that is valid, my picture pops up on the bouncer’s Apple Watch. If I don’t have such a credential, the bouncer sees a skulls and crossbones or something. The customer never sees any of the jiggery-pokery hiding their personally identifiable information (PII). In 99 out of 100 cases, displaying your photograph is the only authentication required: There’s no need for the supermarket to check your fingerprints, for the doctor to demand a PIN or for the pub to take a DNA sample.

Watch Narrative Graphic

This isn’t really magic, or even that complicated. It’s all done using standard contactless communications, standard cryptography, standard protocols, standard chips, cards, phones and photos. Incidentally, after writing many year ago about how we could implement a psychic ID card using the same contactless technology as is used in Oyster cards, I literally fell off my sofa after settling down to watch a long ago Dr. Who Easter special only to see the BBC steal my idea! Yes, Dr. Who got on a London bus using his psychic ID card (see video here), clearly demonstrating that it has an ISO 14443 interface that can fool machinery as well as the psychic interface that can fool people.

Meanwhile, back in the real world… note that when using Brexit Bona Fides, no-one can read your psychic paper — no-one can check your Bona Fides* — unless they are allowed to and when they are allowed to, and all they can see is what they are allowed to see. No more showing the guy in the pub your name, date and place of birth and goodness knows what else just to prove you are 18. Under the hood, it’s all done using keys and certificates, credentials and local authentication: The nightclub bouncer has had to obtain a digital certificate that allows him to interrogate your ID card. His phone sends the certificate to your ID card. The ID card checks it, sees that it is asking for a proof of age. It sends back your photograph, digitally-signed (that’s how his phone knows it’s a real ID card, because it can check this signature). If you’re not old enough to drink, it sends back a digitally-signed red cross (or whatever).

Bona Fides will show the GP your health service number but only if you have the right to NHS healthcare, otherwise it will be blank. Bona Fides will show the employer your national insurance number (but only if you have the right to work in the U.K.). Bona Fides will show the pub absolutely nothing except your photograph (but only if you are old enough to drink). So this is a user-friendly way to implement all of the privacy-enhancing technologies that we would like to see incorporated in a modern national identity card scheme: sector-specific identifiers, pseudonyms, mutual authentication.

 

Now, this may have sounded far-fetched back in 2005, but let me point you to the new Louisiana smart driving licence. As a couple my LinkedIn contacts pointed out, this implements some of the key psychic ID concepts.

  • The smart driving licence app means that a holder can authenticate another person’s Louisiana digital driver’s license.

  • In the bar case study, it allows the customer to select which information she would like to reveal to the bartender—such as that she is over 21. That information is displayed on the phone with a photo and embedded QR code. The bartender scans the code with her app, which tells her that the woman seated on the other side of the bar is indeed over 21. None of the customer’s personal information, such as her name, birth date, or address, is displayed or stored on the bartender’s phone.

Given the the need exists, the vision exists and the implementation is demonstrably feasible, perhaps the trigger of Brexit can give us the digital identity infrastructure that our nation so desperately needs and the lack of which is such a source of friction and inefficiency.

Security and privacy

This is a way to deliver an identity scheme that provides both more security and more privacy. It does not need a big database with everyone’s details and it does not need expensive, custom-built, specialist equipment. In that 2005 piece for Prospect magazine I argued that that the government’s vision for the proposed ID card scheme was tragically out of date and backward-looking. Even the pressure group No2ID were nice about me, saying that that I was someone in favour of an ID scheme who actually knew what I was talking about but “unfortunately his preferred scheme is incompatible with the Government’s plans”. Indeed it was, but that didn’t matter because the scheme was scrapped by the next government anyway.

Writing about this kind of entitlement scheme a few years ago, I thought that a national plan to finally do something useful about identity might obtain “parasitic vitality” (to use one of my favourite ID phrases) from the specific issue of voter ID. Maybe electronic voting could have been a focus to get the gov.verify scheme a flagship project  and get the public and private sector working together to deliver an infrastructure that will be of benefit to all. None of this ever happened and gov.verify has gone, essentially, nowhere. So why am I still going on about this! Well, David Goodhart’s new report and other media comment has set me thinking that Brexit might finally provide the stimulus needed to develop the world’s first 21st century identity scheme. Not digitised identity, but real digital identity. Implemented correctly, it could make the UK a better place to work and play in a relatively short time.

* Bona Fides, for those of you who went to state schools as I did, is a Latin phrase meaning “good faith”. My dictionary definition says that bona fides documentary evidence showing that a person is what they claim to be. Note not who they claim to be, but what they claim to be. It gives the usage “credentials, as in he set about checking Loretta’s bona fides”. I’ll go and register the domain “bonafid.es” right now.

CBDC is a black and white issue

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

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

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

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

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

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

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

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

Cps bcs

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

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

What a cool idea.

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

David Chaum las vegas 2018

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

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

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

We need to go cashless, not drift into cashlessness

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

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

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

Woking going cashless

Cash is vanishing even in Woking.

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

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

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

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

Central banks, tokens and privacy

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

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

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

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

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

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

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

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

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

Cryptomarket Model

 

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

(As The Economist noted on this topic, people might well be “uncomfortable with accounts that give governments detailed information about transactions, particularly if they hasten the decline of good old anonymous cash”.)

In her speech, Ms. Lagarde said that…

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

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

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