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.

Back to the future of Bitcoin

I was very excited to discover via the interweb tubes that Bitcoin is now going into geostationary orbit. In the near future, Bitcoins will be dropping as a gentle rain from heaven. Well, sort of.

Blockstream Satellite is the world’s first service that broadcasts real-time Bitcoin transactions and blocks from a group of satellites in space.

From Blockstream – Announcing Blockstream Satellite

You cannot imagine the nostalgia this story generated for me because, astonishing as it may now seem, the first ‘fintech’ project that I ever worked on involved using satellites to transit financial data and the first book chapter that I ever wrote was about the use of satellite data for business.

Settle down youngsters, and I’ll tell you the tale…

Cast your mind back to 1982. Those interweb tubes are a distant dream. Getting data from place to place is a major effort. In a far away place (Indonesia) a group of talented 10x prima donna programmers are writing software to run on the world’s first regional satellite data system, the Palapa-B1 service (a Hughes HS376, for the technical, with 24 C-band transponders). In the great city of Bandung, one of these dashing young software engineers — me — was initially tasked with writing the (and here’s one for the teenagers) X.28 code and then the X.25 code to allow (amongst other things) bank terminals and other devices to connect via this new satellite network to allow communications between bank branches on far flung islands throughout the Indonesian archipelago and bank offices in Jakarta and elsewhere. You couldn’t buy communications software for the processors we were using. You had to write it from scratch. If you tell the young people of today that, they won’t believe you.

Indo83 3

We were working at a telecoms supplier’s site in Bandung. I know it doesn’t look much from the outside.

A Japanese team were building the baseband modems and implementing the Aloha link protocol that had originally been invented for Alohanet. This gave me the assembly language primitives to work with to implement the CCITT protocols on top. X.28, as if you need any reminding, was the protocol for character input/output (used to connect terminals across a network to mainframes) and X.25 was the packet-switching protocol for interconnecting computers. I still think of terminals at DTEs (Data Terminating Equipment) and I still think of network connections as DCEs (Data Circuit Terminating Equipment). All of these quaint terms vanished from the pages of history about a week after TCP/IP was invented.


As you can see, inside we had access to many modern facilities.

Implementing X.28 meant that staff could log on to bank mainframes using terminals in the branches. Implementing X.25 meant that remote minicomputers could interconnect. Getting the code to work, and getting it to work quickly enough, and getting it to work in the limited memory available was a fantastic education. I loved my time as C ninja, interfacing with what was then leading-edge communications hardware to deliver data services to real users.

Indo83 2

Here I am making a few small adjustments to the communications processors boards.

It was here I learned all my UNIX tricks and C programming stunts. Those were the days when if you didn’t like the way that the team wrote code you could quickly knock up a parser to force them into line (which one of my colleagues did, using YACC), when you had to pretend to the system administrator that you didn’t have root access (which we all did) and when the disk packs held 5Mb so you had to be very careful with the space available *wipes away a tear*.

Indo83 1

As you can see, the team really appreciated my mad programming skills and their contribution to the great success of the project.

In the later 1980s and very early 1990s, I enjoyed working on a wide variety of projects around satellite data communications. I worked on technical architectures, system designs and even on regulation in a team with the now-infamous Vicky Pryce (who was then chief economist at KPMG, and who I remember as a very impressive and really clever, but also really nice person). The very first conference paper that I ever wrote was on the use of satellite data broadcasting to deliver stock exchange data to market participants and I spent happy days at Telekurs, Dow Jones Telerate, the London Stock Exchange and other places working on link budgets, low-noise blocks and forward error correcting codes (this is where I learned about convolutional coding and Viterbi decoders. One of the most interesting areas I worked in was the use of Vertical Blanking Interval (VBI) data services embedded in analogue television transmissions and the potential (abandoned) use of data space in digital television transmissions for value-added (largely financial) services.

Books about satellite communications

A few years later, I worked on a similar system using Very Small Aperture (VSAT) terminals in K-band (too much information, ed.) for a US telecommunications provider, on one of Consult Hyperion’s first US projects. In those still pre-internet days, if you wanted to get data from a branch office back to HQ reasonably quickly you had to pay for a leased data line from the phone company, which was very expensive. Putting a satellite terminal on your roof was a cheaper alternative and as the frequencies went up from C- to Ku-based, so the dish sizes and costs came down. The cost of installing and maintaining a six foot dish compared very favourably with the costs of alternatives, until the internet and mobile phones came along and spoiled all the fun.

Ah, the good old days.

Here’s bibliography from “Before Babylon, Beyond Bitcoin”

In case anyone finds it useful, here’s the full bibliography from Before Babylon, Beyond Bitcoin…

Birch, D. (Ed.) Digital Identity Management–Technological, Business and Social Implications. Gower (Farnham, UK: 2007).

Birch, D. Identity is the New Money. London Publishing Partnership (London, UK: 2014).

Boyle, D. The Money Changers. Earthscan (London: 2002).

Bray, H. You Are Here. Perseus (New York: 2014).

Brown, J and P. Duguid. The Social Life of Information. Harvard Business School Press (Boston: 2000).

Chittenden, O. (Ed.) The Future of Money, Virgin (London, UK: 2010).

Christensen, C. The Innovator’s Dilemma—When new technologies cause great firms to fail. Harvard Business School Press (Boston: 1997).

Cohen, B. The Future of Money. Princeton University Press (Princeton, NJ: 2006).

Conway, E. The Summit—The Biggest Battle of the Second World War. Little, Brown (London, UK: 2014).

Coyle, D. Paradoxes of Prosperity—Why the new Capitalism benefits all. Texere (New York, NY: 2001).

Coyle, D. Sex, Drugs and Economics—An Unconventional Introduction to Economics. Texere (London, UK: 2002).

Coyle, D. Sex, Weightless World: Strategies for Managng the Digital Economy. Capstone (Oxford, UK: 1997).

Davies, Prof. G. A History of Money from Ancient Times to the Present Day. University of Wales Press (1994).

Del Mar, A. A History of Money in Ancient Countries from the Earliest Times to the Present. George Bell & Sons (London:1885). Reprint Kessinger Publishing.

Desan, C. Making Money—Coin, Currency and the Coming of Capitalism. Oxford University Press (Oxford, UK: 2014)

Eco, U. Travels in Hyperreality. Picador (London, UK: 1987).

Edgerton, D. The Shock of the Old—Technology and Global History Since 1900. Profile (London, UK: 2006).

Friedman, F. Money Mischief. Harcourt Brace Jovanovich (Orlando, FL: 1992).

Goetzmann, W. Money Changes Everything—How finance made civilization possible. Princeton University Press (Princeton, NJ: 2016).

Hart, K. The Memory Bank. Profile (London, UK: 1999).

Hock, D. One from Many—VISA and the Rise of the Chaordic Organisation. Berrett-Koehler (San Francisco, CA: 2005).

King, B. Bank 3.0. Marshall Cavendish International (Tarrytown NY: 2013).

King, M. The End of Alchemy. Little, Brown (London: 2016).

Lanier. Who Owns The Future. Allen Lane (London, UK: 2013).

Lewis, M. Moneyball. W.W. Norton (New York, NY: 2003).

Mayer, M. The Bankers—The Next Generation. Plume (New York, NY: 1998).

Nocera, J. A Piece of the Action—How the Middle Class Joined the Money Class. Simon & Schuster (New York: 1994).

Omwansa, T. and N. Sullivan. Money, Real Quick: The story of M-PESA. Guardian Books (London: 2012).

Sargent, T. and F. Velde. The Big Problem of Small Change. Economic History of the Western World series. Princeton University Press (Princeton, NJ: 2002).

Schewe, P. The Grid: A Journey Through the Heart of Our Electrified World. Joseph Henry Press (Washington, DC: 2007).

Schneier, B. Secrets and lies—Digital security in a networked world. Wiley Computer Publishing (New York, NY: 2000).

Seabright, P. The company of strangers: a natural history of economic life. Princeton University Press (Woodstock, UK: 2005).

Seidensticker, B. Future Hype–The Myths of Technology Change. Berrett-Koehler (San Francisco, CA: 2006).

Shenton, C. The Day Parliament Burned Down. Oxford University Press (Oxford: 2012).

Slegin, G. Good Money—Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage 1775-1821. University of Michigan Press (Ann Arbor, MI: 2008).

Sofsky, W. Privacy—A Manifesto. Princeton University Press (Princeton, NJ: 2008).

Solomon, E. Virtual Money—Understanding the Power and Risks of Money’s High-Speed Journey into Electronic Space. Oxford University Press (New York, NY: 1997).

Solove, D. The Future of Reputation—Gossip, rumour and privacy on the internet. Yale University Press (New Haven, CT: 2007).

Standage, T, Ed. The Future of Technology. Profile (London, UK: 2005).

Watson, R. Future Files—A Brief History of the Next 50 Years. Nicholas Brearley (London: 2010).

Weatherford, J. The History of Money. Three Rivers (New York, NY: 1997).