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. 

Mobile money and the race to cashlesness

The wonderful people of the Economic Club of Minnesota (ECOM) invited me to Minneapolis to give a talk at their October luncheon. I was talking, generally speaking, about my “5Cs”: the potential issuers of future digital currencies. If you click on this picture, it will take you to a video of the talk and the Q&A session afterwards. One of the points I made in the talk was the payments in the future are about my mobile phone talking to your mobile phone, not me handing something (banknotes, credit cards, cheques, whatever) to you. This means that the adoption of new forms of money can accelerate without updating or replacing cash registers or plastic cards.

The mobile phone is taking us into a cashless future.

Birch Talking

The Club had arranged for a driver to pick me up from the airport and take me to the hotel. He was very interesting man of Somali origin and we had a nice chat in the car. By the time we got to the Hilton, I thought I ought to call my hosts and ask them to have him onstage instead of me!


Well, he told me about his last visit to the old country, when he was surprised to find himself paying for everything (and he meant everything, from a nickel payment in the food market to a $400 remittance to relatives) using a mobile phone.

“It works on trust”, he told me, “because there is no government”.

(I was thinking of telling him that in my opinion the reason it works at all is because there is no government, because in places where the government has done its best to regulate mobile payments, such as India and Nigeria, mobile payments do not have anything like the penetration that they do in Somalia.)

Mobile payments are spreading. New interfaces (voice), new security (face), new authentication techniques (continuous passive authentication) and evolving network coverage mean that mobile phones are simpler and more secure than cash for a great many people around the globe. But which country will win the race to cashlessness? 

Well, that’s where my driver comes into it. My reasoning as to why he might have been a good choice for a speaker, apart from the fact he was smart and loquacious, is that it is his motherland, rather than the UK (or Sweden, or even the USA, where the Federal Reserve tell us there are now more $100 bills in circulation then there are $1 bills) that may well become the world’s first cashless country. A recent World Bank report showed that Somalia has one of the most active mobile money markets in the world, outpacing most other countries in Africa. It’s even superseded the use of cash (their words, not mine) in the country. Let me repeat that for emphasis. The World Bank say that in Somalia, cash has been “superseded”. It is approaching irrelevance (apart form anything else, no-one uses it there because of widespread counterfeiting) as Somalia heads toward cashlessness.

(As I said in my book, a cashless country does not literally mean a country where cash is extinct. Some cash will linger for post-functional purposes, such as pinning to wedding dresses or waving around in casinos, but that cash will be irrelevant to GDP.)

Interestingly, within Somalia there is already an almost cashless enclave where “payments through mobile she says have rocketed from 5% two years ago to more than 40% now”. That enclave is Somaliland (the breakaway republic of 3.5m people within Somalia), and it may well be Somaliland, rather than powered-by-Swish Sweden, as the place where cash will first vanish into memory. And if your memory is good, you may recall that I wrote about it six years ago, when I said that “Somaliland might well become the world’s first cashless country. Not Iceland or the Netherlands, Korea or Kenya, but Somaliland”.

It hardly difficult to predict that cashlessness would come to Africa first, because as I have often said at conferences, in seminars and when interviewed, it is the mobile phone (not the payment card) that is the nail in cash’s coffin, because a mobile phone is a means to get paid as well as a means to pay. It’s both a “card” and “a terminal” in the world of Visa and PayPal, Faster Payments and Venmo. The spread of mobile payments, rather than the spread of plastic cards, will see cash become irrelevant to law-abiding people in a great many countries. And that cashless world is almost here. As everyone observes, if you go to China or Kenya, you’ll see people paying with phones for everything. In fact when I was in China last, I was in a near-permanent state of shock watching people for everything, everywhere with ubiquitous bar codes. (And almost all of those payments went through third-party providers (WeChat and AliPay) rather than through bank services.)

While in urban China, cash is becoming obsolete, it is still widely used outside the cities, which is why I still think that Somaliland might win the race though, just as I said all those years ago. Don’t listen to me about it, listen to what Mr. Rashid, a tea seller there, has to say about it: “I never see cash”. And his teas sell for 2,000 Somaliland Shillings each. Which is about 25 cents. A quarter. And his customers use phones to pay.

The world of mobile payments has fascinated me from its earliest days and I’ve been able to observe its evolution first hand. My colleagues at Consult Hyperion worked on the UK’s first prepaid scheme, first WAP “walled garden”, the first NFC trials and, I’m proud to say, M-PESA in Kenya. Experience has given a pretty realistic picture of what is happening across the payments industry in general and mobile payments in particular, and my view is that we are heading toward a tipping point that will see us accelerating toward cashlessness.




Something funny is going on with our great British cash

In our United Kingdom, the value of currency in circulation has dropped, year on year, for seven consecutive months (see chart), for the first time since records began in the 1960s. This is something of a surprise. For many, many years the use of cash for purposes such as shopping has been steadily decreasing while the amount of cash “in circulation” has been steadily increasing. Broadly speaking, the use of cash for legitimate activities has been falling while the use of cash for drug dealing, money laundering, tax evasion, payments to corrupt officials and so on has been rising. Hence my surprise at this shift in the statistics.

Of that cash that is “in circulation”, the £16.5 billion in £50 notes is particularly puzzling. Earlier this year the Treasury said that £50 notes were “rarely used” for routine transactions and that “there is also a perception among some that £50 notes are used for money laundering, hidden economy activity, and tax evasion”. I’ll say. This perception is widespread, by the way. A couple of years ago Peter Sands, the former head of Standard Chartered, said that the main use of the £50 was illicit and he’s a banker not a mere blogger such as myself.

Given this perception, I would have thought that is was time for the Treasury to tell the Bank of England to stop making life easy for criminals and withdraw the £50 over a two year period. But apparently not. Given that no-one is using them for legitimate purposes, the Bank of England has decided that now is a good time to bring the £50 up to date and make it out of plastic. Robert Jenrick, exchequer secretary to the Treasury, explained the decision by saying that “people should have as much choice as possible when it comes to their money and we’re making sure that cash is here to stay” although I don’t think anyone in the Treasury or anywhere else was asking for cash to be removed from circulation, only for a narrowing of the spectrum (dumping 1p and 2p coins, two-thirds of which are only used once, and removing £50 notes leaving the £20 as the highest denomination).

Oh well. I suppose tax evaders are more of an electoral force than I thought. According to the HMRC’s latest estimates that are shown the chart below (for 2016/2017), almost half of the tax gap is down to small businesses and they account for nearly three times as much of the missing tax as “criminals”. I’m not sure if these groups are natural Conservative voters, but they must in some measure account for the governments reluctance to inconvenience those responsible for the lion’s share of missing taxes.

UK Tax Gap Customers 2017 Picture


As an aside, the Bank says that it wants a scientist to be the face of the new notes and (god help us) says it will ask the public who it should be. But why a scientist? That doesn’t seem appropriate to me. Surely a much better choice would be the late and much lamented national treasure Sir Kenneth Dodd of Knotty Ash who, rather famously, kept enormous piles of cash in his attic because he didn’t trust banks. Or perhaps one of our greatest jockeys, Lester Piggott, who was once sent down for three years for tax evasion. I think the Bank should be told: the medium is the message.

Why do I keep going on about this? It’s because the people who benefit from the convenience of £50 notes (eg, builders avoiding VAT) are doing so at the expense of law-abiding tax-paying citizens (eg, me) and I have to fill in my tax form soon.