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.

Ten more years

We’ve just had Bitcoin’s tenth birthday, so like most other electronic payment aficionados I’ve been mulling over the trajectory of the noted peer-to-peer electronic cash system. My interest in it goes back long way. I was  invited to speak to the first European Bitcoin conference in Prague back in 2011 having previously given perspectives on the project — in blogs, magazines and even on BBC radio — that were not especially enthusiastic. As an example, in Prospect Magazine back in 2011 I wrote “while many of us would like currency management taken away from governments, that doesn’t mean an unmanaged solution will be any better”.

That Prague conference was therefore an opportunity for me to learn more about Bitcoin and the Bitcoin community as well as to test my arguments with an informed crowd. My views didn’t change – I still didn’t think Bitcoin would crack the mass market – but looking back on it now is a fascinating slice of early Bitcoin life.

In the first presentation, Sergey Kurtsev from IMCEX said that anonymity is misunderstood and that the public don’t need it. I was upset about this, not because he was absolutely correct about it, but because it was going to be the subject of my talk in the afternoon. So it led to some emergency last-minute Keynote acrobatics on my part!

Amir Taaki from the Bitcoin Consultancy gave a presentation that was quite wide-ranging so I will use that presentation as a peg to hang a few comments on. He said, essentially, that there were three problems with Bitcoin: the marketplace, the technology and finance.

  1. Marketplace. Amir said that consumers had no reason to use Bitcoin because attributes that Bitcoin projects (such as that anonymity) are not valued by consumers and the merchants obviously don’t see enough value to drive consumers towards it. I don’t see that anything has changed in the last decade. As I pointed out in 2015, if there’s no demand for Bitcoin for porn, then there’s no future for it as a means of exchange!

  2. Technology. There were scale issues, as people much cleverer than me (e.g., Ben Laurie) pointed out at the very beginning, but the key technology issue was that it was hard to use. Now it’s a bit easier because you have a variety of Bitcoin wallets to choose from.

  3. Finance. Amir made a point about “compromising events”. He said that if you want people to hold Bitcoins instead of dollars or gold, they have to have real faith. Every time they read about exchanges crashing and money vanishing that becomes more unlikely. As I have posted with wearying repetition on Twitter across the last decade “help I want my anonymous, untraceable digital cash back!”.

When it came to my talk (which you can see below), I did try to make constructive criticism. I tried to highlight some areas of commerce where the existing mass market solutions might be vulnerable to well-crafted alternatives (e.g., social networking, games, kids) or where a significant improvement in security would generate value.

 

( I also emphasis, as I recall, that any realistic mass-market solution must be mobile-centric.)

Overall, as I’d previously written, I was unconvinced that Bitcoin would make a good currency or scale into the mainstream economy, mainly because the anonymity that was the attractive feature to the early-adopting bitcoiners was not attractive to the mass market. I still don’t see any traction for Bitcoin in the mass market. Back in 2015, I set off to visit Swindon on the 20th anniversary of the launch of the UK Mondex scheme (an offline, smartcard-based form of electronic cash) and discovered a shop advertising that they accepted Bitcoin. But when I attempted to pay with Mr. Nakamoto’s peer-to-peer electronic cash system, no-one could remember the password and when I asked to speak to the manager, he told me that no customer had ever asked to pay with Bitcoin anyway. 

Bitcoin at POS in Swindon

 

(Swindon, once twinned with Disney World, is the epicentre and bellwether of the transition to new forms of money. In two decades it went from a place where no-one used Mondex to a place where no-one used Bitcoin.)

More interestingly, with the perspective of hindsight, a couple of the speakers at the event suggested creating a scheme on top of Bitcoin rather than use Bitcoin itself, which to my mind adumbrates the evolution of the token, which I do think has more chance of success. I wrote about this last year, saying that I see Bitcoin and its cousins not as prototypes but as a base layer that will be used by some, but not by most, people to make real transactions in the future. I think most transactions will take place at the token layer, exchanging bearer assets over an efficient (no clearing or settlement) transaction layer.

So the blockchain is new and so on… and yet… the idea of a trading “money like” instruments without clearing and settlement is hugely appealing. This not on idealogical grounds but on economic ones: it’s cheaper.

Whether the transaction layer underneath will be Bitcoin or not is anyone’s guess, although I suspect it will not. If the function of the transaction layer is to be a global, shared resource for security infrastructure then the protocol will surely need to be optimised in that direction and the operations will surely need to be organised in such a way as to prevent any well-funded (at the National State level) attacker from being able to control sufficient of the necessary resources to subvert or disrupt that infrastructure. No-one is going to move their stock market over to a platform where trading might be disrupted by crypto-kitties.