Get your Bristol Pounds here

Bristol is a great city in the west of England. It was the big city to me, because I grew up in Swindon, some 40 miles away from this metropolis, and can well remember visits to its attractions. These included an ice rink and the Colston Hall, where I saw the first ever performance by a popular beat combo for which I saved good money and paid for the ticket myself. It was the Sensational Alex Harvey Band, fronted by the eponymous hard-drinking Glaswegian and featuring theatrical lead guitarist Zal Cleminson. What a band! Their music will be continue to be celebrated the length and breadth of the land when Ed Sheeran is nothing more than a wikipedia footnote in the history of Soma-music for the masses. But I digress.

These days the city, while famous for its excellent University and other cultural attractions, is more noted for its contribution to the evolution of next-generation money, being the home of the Bristol Pound (the B£). Here’s a B£ fiver, accepted at par at a number of local merchants. The notes are lovely: this one features art from local children.

Bristol Pound

Now, while the notes are lovely, they have one distinct feature that sets them apart from the Bank of England’s rival product: they carry an expiry date. I think this might be something to do with the law of the land and crude attempts to maintain the Bank’s monopoly over currency rather than an economic calculation about hoarding, but nonetheless it does mean you’d be unwise to stuff them under your mattress and forget about them. If you get one, get out and spend it.

Bristol Pound

The B£ has been around for a few years. It’s made the jump from paper currency to digital currency already and if you download the B£ app, then you can pay with it at a number of local businesses. Those businesses can also transfer money peer-to-peer within the system to pay their suppliers. I didn’t get a chance to try this out because to get a B£ account you have to have a Bristol postcode so I shall harass some poor student into to trying it out for me and report back. Meanwhile, here’s the app in action at the Watershed Cafe.

Bristol Pound

So why am I writing about the B£ now? Well, the B£ is about to undergo a pretty revolutionary change. To understand why, first recall that strictly speaking while the B£ has some characteristics of a currency (you can pay your council tax with it, for example) it isn’t an independent currency. Rather, it is a form of “currency board”, an arrangement that provides for a fixed exchange rate against some other currency. The B£ in circulation are backed by a 100% reserve held in another currency. In this case, the other currency is Sterling. That Sterling is sitting in an account at the credit union. So far, so Ecuadorian.

Talking about Sterling, you’ll recall that almost all of the Sterling in existence (well, 97% of it) was created as bank credit. This happens when you pop down to, say, RBS to borrow ten grand to buy a car. At this point RBS just invent the ten grand out of thin air on a spreadsheet somewhere and add it to your account. You then send his imaginary money through the faster payment service (FPS) to the car dealer and it ends up in their account. They pay some out in wages and it ends up in employees accounts. Some of those employees deposit it in the RBS and so on and on. I know it sound implausible, but I can assure you that it’s true: our money is just made up.

B£ don’t work this way. Right now, if you could go to the credit union to borrow B£, then could only lend you the B£ that they had received as a deposit from savers. This autumn, however, B£ are going to become real money, in the sense that they are going to start making the stuff up and lending it to small businesses in the community. The loans will be made in B£ and will be repayable in B£.

Bristol Pound

I’m very interested in the world of complementary currencies and am always curious to see new experiments in the field. In Meyer and Hudon’s paper on “Money and the Commons: An Investigation of Complementary Currencies and their Ethical Implications” at the Solvay Brussels School of Economics and Management (May 2018), they distinguish between “social commons” and “commercial commons” as frameworks for new kinds of money and these categories broadly correspond to the notions of private currency and community currency that I explore in “Before Babylon, Beyond Bitcoin”. The B£ is born in the social commons and is intended to stimulate economic activity with its community.

I used to be sceptical about this kind framework and much more interested in the commercial framework because a collection of interlinked community currencies seemed to me less economically efficient in aggregate. I still think this is true, but it may not be the point. I’m wondering if we may need to explore ways to increase economic activity within communities at the expense of inter-community transaction costs as a response to inequality and the unrest that it may cause. This has implications, because (as I wrote for Quartz recently) if communities rather than individuals become central to money creation then these currencies will be imbued with the values of the communities that create them.

This will be a really interesting experiment to see if a social currency can genuinely stimulate a local economy and, as I am very interested in the specific example of city-based social currencies because of my feeling that communities have some role to play in the future of digital money, I will be following the B£ credit experiment with interest and will report on its progress in due course.

Incidentally, I do feel bound to mention one obvious improvement that might be made to the app. I think a button to add a tip might be usefully provided.

Bristol Pound

By the way, I happen to have three of the lovely Bristol tenners on my desk even as I write and I will cheerfully hand them to the first three people who ask for them in the comments below so that they can visit that lovely city and try out some new money for themselves.

Happy Birthday Credit Card Industry

Today is a very important day for us payments nerds. It’s the 60th anniversary of the “Fresno Drop”, the birth of the modern credit card industry. On 18th September 1958, Bank of America officially launched its first 60,000 credit cards in Fresno, California, setting in motion an experiment that changed the American way of borrowing, paying and budgeting.

And, in time, changed everyone else’s way of doing those too.

If you want a good introduction to the history of the credit card, from the Fresno Drop up to the Internet, I’d recommend Joe Nocera’s “A Piece of the Action“, which I read many years ago and still pick up from time to time.

If you want to spend five minutes having a quick look at where the modern credit card business comes from, here’s the short version (courtesy of CNN Money)The most extraordinary episode in credit card history is the great Fresno Drop of 1958. The brainchild of a Bank of America middle manager named Joe Williams, the “drop” (which is marketing-speak for “mass mailing”) was an inventive tactic to give Americans their first highly addictive taste of credit card living. Keep in mind that charge cards in those days–like Diners Club or American Express–were mainly used by jet setters, businessmen on expense accounts, and ladies who lunched… Williams wanted to change that. In September 1958, he mailed out 60,000 credit cards, named BankAmericards, to nearly every household in Fresno. Mind you, these cards arrived in the mailboxes of people who had never seen–let alone applied for–a card like that. But now thousands of ordinary people suddenly found that thousands of dollars in credit had literally dropped into their laps…

There you go. Now you can go ahead and bore at least one person today with the story of the Fresno Drop. I know I will.

As you might expect, I cover this episode in my book Before Babylon, Beyond Bitcoin, where I point out that what is sometimes overlooked from our modern perspective is that the evolutionary trajectory of credit cards was not a simple, straight, onwards-and-upwards path. For the first decade or so, it was far from clear whether the credit card would continue to exist as a product at all, and as late as 1970 there were people predicting that banks would abandon the concept completely. What changed everything was a combination of regulation and technology: regulation that allowed banks to charge higher interest rates and the technology of the magnetic stripe and Visa’s BASE I online authorisation system. This changed the customer experience, transformed the risk management and cut costs dramatically while simultaneously allowing the banks to earn a profit from the business.

It looks more than a decade for the Fresno drop to turn into the mass market business, integral to the economy, that we know today. So what financial technology experiment of our days will be of similar magnitude a decade because of regulatory and technological change a year from now? My guess would be something to do with tokens, but I’d be curious to hear yours.

Tokens and Twincoins

For some time – since when I first began jotting down an outline for my last book, in fact – I have been boring clients, colleagues and carvings senseless with my mantra that while Bitcoin isn’t the future of money, tokens might well be. What’s more, as I have presented more than once, those tokens will have an institutional relationship with “real world” assets. Now I see that none other than noted cryptocurrency investors the Winklevii have launched just such as product. Gemini Trust, their cryptocurrency exchange, has won approval from New York finance regulators to launch Gemini Dollars.

These are tokens on the Ethereum blockchain that are pegged in value to the U.S. dollar (in other words, they are kind of digital currency board). State Street Bank will hold the reserve of one greenback for every token issued and, I assume, they will be redeemable on demand and at par.

Now, I know nothing about entrepreneurhip or venture investing or creating cryptoasset trading platforms, but I think they are on to something. Many people will want to hold dollars as digital bearer instruments rather than as a bank balances. When my smart contract sends a Gemini dollar to your smart contract, that’s pretty much that. It’s inexpensive and fast.

This idea of using cryptocurrencies to support tokens linked to something in the real world is hardly new. But it’s becoming something of a focus now. Kevin Werbach published a very good article about tokens on the Knowledge @ Wharton site recently. He set out a useful taxonomy to help with discussion and debate around the topic, saying that

  • There is cryptocurrency: the idea that networks can securely transfer value without central points of control;

  • There is blockchain: the idea that networks can collectively reach consensus about information across trust boundaries;

  • And there are cryptoassets: the idea that virtual currencies can be “financialized” into tradable assets.

I might use a slightly different,  more generalised approach (because a blockchain is only one kind of shared ledger that could be used to transfer digital values around), but Kevin summarises the situation exceedingly well. His perspective is that cryptocurrency is a revolutionary concept but the jury is still out on whether the revolution will succeed, whereas the shared ledger and the assets that might be managed using those shared ledgers are game-changing innovations but essentially evolutionary. The idea of such assets, which I will label digital bearer instruments, goes back to the long-ago days of DigiCash and Mondex, but the idea of implementing them using technology that is (in principle) available to every single person on the planet is wholly new. 

This combination of the revolutionary but unproven and the evolutionary but nevertheless game changing fascinates me and I’ve been exploring it in a number of different areas. One such area is money, of course, and more particularly the notion of central bank digital currency. I feel this is often discussed in a confusing way (not by me). I see articles on the topic that almost randomly switch between “digital currency”, “cryptocurrency” and “digital fiat” to the point that they are essentially meaningless. So I thought it might be useful to build on my work and Kevin’s perspectives to create a worthwhile framework for exploring the topic.

Let’s begin by exploring what the central concept is all about. Ben Dyson and Jack Meaning from the Bank of England discuss a particular kind of central bank digital currency (what some would call  “digital fiat”) with quite specific characteristics.

  1. Universally accessible (anyone can hold it);

  2. Interest-bearing (with a variable rate of interest);

  3. Exchangeable for banknotes and central bank reserves at par (i.e. one-for-one);

  4. Based on accounts linked to real-world identities (not anonymous tokens);

  5. Withdrawable from your bank accounts (in the same way that you can withdraw banknotes).

This seems to me to be quite sensible definition to work with. So, digital fiat is a particular kind of digital money with these specific characteristics. We can now start to fill in the blanks about how such a system might work. For example, should it be centralised, distributed or decentralised? Given that, as The Economist noted in an article about given access to central bank money to everybody, “administrative costs should be low, given the no-frills nature of the accounts”, and given that a centralised system has the lowest cost, that would seem to point toward something like M-PESA but run by the government.

There are, however, other arguments in favour of using newer and more radical technological solutions., not least of which is our old friend privacy. Again, as The Economist notes, 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”. However, as I have often written, I think there are ways to deliver appropriate levels of privacy into this kind of transactional system and the pseudonymity is an obvious way to do this efficiently within a democratic framework.

Aside from privacy, there’s another argument for moving to new technology rather than a centralised database, and it has come to the fore in the light of the recent Visa Europe systems collapse, which is what to do to make such a digital money system, 99.999% available. Here is where new technologies might be able to deliver the step change that takes us into the realm of practical digital fiat. Such a payment system would be an element of critical national infrastructure, which is why it might be worth looking at some form of shared ledger technology, possibly even a blockchain of some kind, in this context.

Here’s my take on the situation, then, with a diagram that I’ll be showing at Future Tense in Zagreb on 2nd October. It is congruent with Kevin’s taxonomy but adds the “digital identity” layer to show that the token trading might be pseudonymous in most practical circumstances within specified limits. 

Digital and Crypto Layers

 

In this formulation, we have a digital value layer that may or may not be implemented using a blockchain to create the bearer instruments, then a cryptoasset layer built on top of that (let’s put one side what the different kinds of cryptoassets might be as for this discussion I’m only interested in digital money) and then a digital identity layer on top. My assumption is that cryptoassets will be implemented using what some people call “smart contracts” (I prefer the term “consensus applications”) and the general term for these vehicle used to move these assets is the “token”. So I hope you can now see how the world of Bitcoins and tokens and Initial Coin Offerings (ICOs) and blockchains and digital identity all come together here.

So. If this is sensible way to implement money, as the Winklevii and others seems to think, who will manage the assets that are linked to these tokens? The first and most obvious possibility is commercial banks, as in the case of Gemini Coin. But there are others, as I set out in my most recent paper, and I’ll be exploring all of them in Zagreb. See you there.