The first ICO, or “unstable coin” as it might well have been called

In her excellent book Stuff and Money in the Time of the French Revolution, Rebecca Spang cautions against using the story of the attempted reinvention of money following the French Revolution as part of a superficial “transition to capitalism” narrative, but as a non-historian it did seem to me that there is something for today in comparing the evolution of money in industrialising Britain and the evolution of money in revolutionary France. To me, it is a contrast between British mercantile pragmatism to exploit bottom-up innovation with French idealism and top-down change, which is why I included a discussion of the assignats in my book “Before Babylon, Beyond Bitcoin”. All of which explains why I was intrigued by Tuur Demeester’s reference to assignats as the “first ICO”.


Now, in this context, I would probably have awarded the title of first ICO to John Law’s notorious Banque Royal (see “The Mississippi Bubble) but Tuur makes in interesting point which is worth reflection. How did the assignats come about?

In pre-revolutionary France it was the monarch’s prerogative to set the exchange rate between the money of account (livre) and the money of reckoning (the coins, such as the ecus). Rebecca notes that in the last 26 years of Louis XIV’s reign, this exchange rate changed 43 times! There was actually very little of this money out in the real economy because pre-revolutionary France was, as pre-industrial England had been, a reputation economy. The great majority of the population engaged in commercial activities with well-known and trusted counterparties. Buying and selling was done “on tick” as people maintained a web of credit relationships for periodic reckoning.

In an economy based on trust and once that trust fails (or fails to scale), the substitute of money is required to oil the wheels of commerce. This is exactly what happened in France where after the revolutio, a lack of trust in the state quickly became a shortage of credit in the marketplace and therefore an immediate demand for a circulating medium of exchange.

But from where? France did not have a central bank along the lines of the Bank of England, so one of the first acts of the new revolutionary government was to take over Church lands and use them as security to issue interest-bearing bonds with the redemption in portion of the land itself. Were the blockchain available to them, I am certain that Robespierre and the other would have certainly gone down the Venezuelan route and gone with an ERC-20 token in an ICO, but they were restricted to the technology of the time and thus the paper assignats were created.

They didn’t last that long. The interest and redemption were soon abandoned and the notes, the assignats, simply became state-issued inconvertible fiduciary notes. There followed what Professor Glynn Davies called in his magisterial History of Money from Ancient Times to the Present Day “the usual consequences”: inflation, dual-pricing (with note payers forced to give more than coin payers), hoarding and (Gresham’s Law again) the practical disappearance of coins as capital fled across international borders. By October 1795, 100 Franc assignats could be traded for only 15 sous in coin and the Paris riots of the time opened the door for Napoleon. It wasn’t until the Bank of France was founded in 1800 that the nation at last enjoyed the same kind of public institution that England, Holland and Sweden had had for more than a century.

There seems to me a useful comparison to made between those revolutionary times and ours. If we expect the state to come up with some grand plan to reinvent a money de nos jours, we run the risk of it going hopelessly wrong. If we leave a regulatory space for the merchants to play in, they may well come up a better idea.

Why am I so interested in these long-gone Latin precursors of the Euro? Well, Rebecca notes that when the assignats wentinto circulation, people treated the new paper currency as the bills of exchange that they were familiar with. They did not value the anonymity of the notes at all. In fact, they signed them as they passed them around. Who had used a note attested to its validity and the identity of the previous holders gave the notes value! A note signed by a trustworthy person such as Joanna Lumley or Sergio Aquero would be worth more than one signed by me, for example. For the citizens, fungibility was not all that.

Or, to look at it from a modern perspective, the new money was identity.

Show me the money

In 2016, the latest year for which information is available, cash was used for 44% of all consumer transactions in the UK. That was down from 50% the previous year and from 68% a decade earlier. Victoria Cleland, Chief Cashier at the Bank of England says that the value of notes “in circulation” has been increasing year on year for the past decade or so and that “we are still seeing growth in total demand for cash.”

What on Earth are these notes being used for if they aren’t being used to buy things? This isn’t a UK problem. The latest figures from the Bundesbank show that nine out of every ten euro banknotes issued in Germany are never used in payments but hoarded at home and abroad as a store of value, the Bundesbank has found. Not “rarely”. Not “infrequently”. Never. The notes are not in circulation at all but are stuffed under mattresses.

Down under, the Reserve Bank of Australia (RBA) Bulletin for September 2017 notes that the value of notes “in circulation” has gone up 6% per annum for the past decade while the use of has collapsed (from two-thirds of consumers payments down to one-third) over the same period. It goes on to note that higher cash usage may be concentrated in groups not included in the survey of consumers (who may well use cash more often than the average consumer) as well as the shadow economy.

Aha. The shadow economy.

A couple of years ago I was at an event where the Chief Cashier said that only about a quarter of the cash the Bank put’s into circulation is for “transactional purposes” (i.e., used). They have a richer categorisation than the Bundesbank for the rest of it, saying that it is either shipped overseas (i.e., exported), kept outside of the banking system (i.e., hoarded) or used to support the shadow economy (i.e., stashed).

Aha. Stashed.

I wrote a comment piece on this for The Guardian, looking at what the key drivers in each of them might be. The first, cash that is used, is easy. We know that the driver is technology but that the impact is weak. In other words, new technology does reduce the amount of cash in circulation, but very slowly.  Moving on to the next category, I know it’s a rather simplistic analysis, but if the amount of cash that is being hoarded has been growing then that would tend to indicate that people have lost confidence in formal financial services or are happy to have loss, theft and inflation eat away their store of value while forgoing the safety and security of bank deposits irrespective of the value of the interest paid. If, on the other hand the amount of cash that is being stashed has been growing then the Bank of England is facilitating an increasing tax gap that the rest of us are having to pay for. In this context cash is a mechanism for greatly reducing the cost of criminality while it remains a penalty on the poor who have to shoulder an unfair proportion of the cost of cash. In this case, we should expect to see a strategy to change this obviously suboptimal element of policy.

The amount of cash that is being exported is hard to calculate, although the Bank itself does comment that the £50 note (which makes up a fifth of the cash out there by value) is “primarily demanded by foreign exchange wholesalers abroad”. I suppose some of this may be transactional use for tourists and business people coming to the UK, and I suppose some of it may be hoarded, but surely the strong suspicion must be that these notes are going into stashes. Note “primarily”. 

My personal feeling is that stashes have grown at the expense of hoards. In a fascinating paper by Prof. Charles Goodhart (London School of Economics) and Jonathan Ashworth (UK economist at Morgan Stanley), they note that the ratio of currency to GDP in the UK has been rising and argue that the rapid growth in the shadow economy has been a key cause. If you look at the detailed figures, you can see that there was a jump in cash held outside of banks around about the time of the Northern Rock affair, but as public confidence in the banks was restored fairly quickly and the impact of low interest rates on hoarding behaviour seems pretty marginal, there must be some other explanation as to why the amount of cash out there kept rising. Two rather obvious factors that do seem to support the shape of the curve are the increase in VAT to 20% and the continuing rise in self-employment (this came up a couple of times in comments to The Guardian piece), both of which serve to reinforce the contribution of cash to the shadow economy.

There are a awful lot of people not paying tax and simple calculations will show that the tax gap that can be attributed to cash is vastly greater than the seigniorage earned by the Bank on the note issue. Cash makes the government (i.e. us) considerably worse off. In summary, I think think the Bank’s view on hoarding is generous and that it is the shadow economy fuelling the growth in cash “in circulation”. There’s something wrong about this, especially when we know that the cost of cash falls unfairly on the poor. It is time for Bank of England to develop an active strategy to start reducing the amount of cash in circulation, beginning with £50 notes.

The law of entirely expected consequences case study: payment surcharges

Our Prime Minister, Mrs. Theresa May, went a bit Trump and tweeted. Cool. And here it is.


 The odd thing about this is that every single part of it is manifestly and demonstrably untrue. I’m genuinely baffled as to why Mrs. May (who spent 12 years working at the Association of Payments and Clearing Services, the precursor to UK Payments) should make such a transparently false claim to obtain credit for something that she should be against. To be clear: the charges were not hidden, the ban is not only on credit and debit card surcharges, and it won’t help millions of people to avoid rip-offs. Let me explain, starting with what I saw on 13th January when I went to pay for a flight on British Airways…

My first "no surcharge" purchase

Now normally when I use my BA Amex card to book a flight, I have to pay a credit card surcharge. I don’t mind paying the surcharge because I want the protections that the use of credit cards give me as a consumer and also because I want the frequent flier points I get for using this card. As of 13th January, I don’t. I get all this stuff for free because “new rules which will come into effect on 13 January 2018 will mean you cannot be penalised for choosing to pay by card, either online or in-store”. Happy days. Thank you Mrs. May!

Unfortunately, the entirely predictable result of this ban on card surcharges is that prices will go up.  For the press to say that ban has “backfired” because “consumers face higher prices and new ‘service charges’ as retailers and businesses plan to circumvent the Government’s ban” is laughable. The ban has worked entirely in accordance with the laws of economics.

To see why, let’s go back to Mrs. May’s odd social media message. First of all, the ban on card surcharges is not because of Mrs. May or the British government. It is because of the European Union’s Second Payment Services Directive (PSD2), although in the UK the government has gone further than PSD2 by, essentially, banning surcharges for all electronic payments not just the “four party” schemes. Thus it was the EU that banned “credit or debit card” surcharges, not the British Government, it is indeed the British Government, rather than the EU, that is making poor people pay for my air miles.

Now, just a quick recap of Economics 101. If the government passed a law that (for example) health care is free, that wouldn’t mean that doctors would start working for nothing. It would mean that doctors would have to paid in some other way (out of general taxation, for example). Similarly, passing a law that retailers cannot surcharge for cards doesn’t mean that everyone at Barclaycard is now working for free. Yes, the government has stopped retailers for charging for cards, but that does not mean that the costs are not going to go away. Chip and PIN terminals, 3D Secure gateways and Section 75 chargeback guarantees don’t grow on trees. What will happen?

Suppose you are an online merchant selling, oh I don’t know, let’s say Dungeons and Dragons miniatures. Let’s say your card service comes from a top quality merchant service provider who charges you 25p per transaction. From 13th January…

  1. Well, they could stop taking cards. But that would mean they lose business.

  2. They could have a loyalty scheme (spend £50, get £5 off your next purchase) but only for people who pay with cash.

  3. If half their sales are cash and half on card, then they could put the price of the average basket up by 10p. This is a nice simple solution and it’s good for me, since the customers who pay with cash are now subsidising my John Lewis cashback (since I’m only paying the extra 10p not the full 25p).

  4. Or they could try it on and add a service charge of 25p to all orders. This is what, for example, Just Eat have done.

But why should these dastardly people be allowed to get away with any of these options? Why shouldn’t they be forced to simply accept lower profits and a reduced standard of living as suggested by The Daily Telegraph which is upset that “retailers and other companies are planning measures to ‘sneak’ around the rules“. The dastardly plots unveiled by The Telegraph, precisely as you would expect from an analysis of the environment, are those that I outlined above: refusing card payments, increasing prices and introducing new ‘service charges’.

This is ridiculous from The Telegraph. Refusing to accept cards because the government has made it uneconomic is not sneaking around the rules, it is responding to the rules. And unless The Telegraph is proposing to step in and pay the cost of accepting cards for all merchants, neither is increasing shelf prices. In fact, I absolutely guarantee that prices will rise in accordance with basic laws of economics that The Telegraph should be familiar with. Unlike government ministers, apparently. The Economic Secretary to the Treasury, Mr. Stephen Barclay, said “these small charges can really add up and this change will mean shoppers across the country have that bit of extra cash to spend on the things that matter to them”. How? I have no idea. The UK travel industry, for example, pays around £150m per annum in card charges. Who does Mr. Barclay think is going to pay for the cards, terminals, fraud, bad debt, guarantees and all the rest of the infrastructure in the future? 

The result of banning card surcharges (ie, price-fixing for payment services) will be two-fold. First, it will push retailers into having their own apps that exploit open banking and use instant payments instead of cards. I can assure you that I won’t book a holiday or buy an expensive sofa this way: I want the legal protections that come with credit cards. However, the costs of accepting cards gives these merchants plenty of margin of to play so they will be able to incentive customers away from the existing rails. Second, it will transfer money from poor consumers who are trapped in the cash economy to people like me with cashback and airmiles cards. As the media have belatedly noticed (having not asked me about it in advance) “even those paying cash are set to lose out, as some companies – including food delivery firm Just Eat – plan to apply the cost increases to all customers

The outcome, as it happens, may be even more perverse. Since debit cards cost merchants less than credit cards, consumers switching to credit cards to get the rewards will mean the merchants overall bill for accepting cards will go up! This will hit hard in travel, for example, where “removing the surcharge will result in a significant shift away from payments by debit card and bank transfer so the increase [in extra costs] will be greater than the current credit card surcharge”. Not my words. “Greater than the current credit card surcharge”. So prices will rise by more than the current surcharge, despite Mr. Barclays’ odd prediction that shoppers around the current will have “that bit of extra cash”. No, shoppers around the country won’t. But certain shoppers (eg, me) will, because it the cost of the flight goes up by £1 but I would have had to pay a £2 service charge to use my rewards card before, I’m now saving a £1 and still getting the rewards.

I have long maintained that if you are going to regulate anything in this field then what you should do is require retailers to make the costs of payment choices clear and then let the market do the work. If the government wants to take action, it should adopt my plan to minimise the total social cost of payments and make debit cards the “zero”. In other words, companies should not be allowed to surcharge for debit cards and banks should be required to provide zero interchange debit cards as a condition of holding a retail banking licence. If companies want to surcharge for payment instruments that have a higher overall total social cost (cheques, cash, credit cards, charge cards, cowrie shells or euros) then that’s fine. And there would be a logic to it, unlike the current situation. Meanwhile, “consumer experts have called for regulatory enforcement to ensure businesses cannot dodge the rules“. 

This is absolutely hilarious. Who are these experts? What Soviet-style commission is going to take control of the taxi company’s pricing policy and decree what level of service charge, if any, is to be allowed? The whole situation is nonsensical. If the government, merchants or anyone else thinks that the costs of accepting cards are too high, then they are free to create an alternative that is less expensive. And if merchants want to know how to create an alternative lower cost option for customers *cough* open banking *cough* then they should feel free to call me and I’ll put them in touch with the right people (hint: Consult Hyperion).

Crime of the (new) century

Here’s something that I’m surprised we don’t see more of. Pavel Lerner, the CEO of the cryptocurrency exchange Exmo Finance, has been released by kidnappers after the payment of a $1 million bitcoin ransom. According to the Financial Times, the Ukrainian interior minister specifically labelled the crime “bitcoin kidnapping and extortion”. I would have asked for Monero, rather than traceable bitcoins, but there you go.

Given the number of Bitcoin millionaires wandering around — I bump into them at every conference I go to these days — you would have imagined that the more enterprising and forward thinking members of the cosa nostra (the coder nostra, as I call them) were out in force. Stand around outside Consensus or Money2020 and bundle most anyone into a van and drive them off into the desert and you’re sure of a Bitcoin, Ripple, Ether or Bitcoin Cash payday. It’s a puzzle that this doesn’t happen all the time, although it’s entirely possible that it does and that I never get to hear about it because I’m not rich enough, just like those Silicon Valley sex parties.

So is kidnapping for cyber-ransom the defining crime of the 21st century? Actually, I suspect not. What if, rather than traditional money–related crimes such as kidnapping and extortion, there were much better crypto-crimes invented in parallel to the new forms of crypto-money made available by technology? Is there such a crime that is unique to this virtual world? Not a virtual shadow of a crime that has been around since year zero, but a wholly new crime for the virtual world? Actually, one such crime was invented many years ago. It’s the “assassination market” that I wrote about in “Before Babylon, Beyond Bitcoin“.

An assassination market is a prediction market where any party can place a bet (using anonymous crypto-currency through the TOR network) on the date of death of a given individual, and collect a payoff if they “guess” the date accurately. This would incentivise the assassination of specific individuals because the assassin, knowing when the action would take place, could profit by making an accurate bet on the time of the subject’s death.

Here’s how the market works. Someone runs a public book on the anticipated death dates of public figures. If I hate a pop star or politician, I place a bet on when they will die. When the person dies, who ever had the closest guess wins all of the money, less a cut for the house. Let’s say I bet a fiver that a specific TV personality is going to die at 9am on April Fool’s Day 2018. Other people hate this personality too and they put down bets as well. The more hated the person is, the more bets there will be.

April Fool’s Day comes around. There’s ten million quid bet on this particularly personality. I pay a hit man five million quid to murder the personality. Hurrah! I’ve won the bet, so I get the ten million quid and give half to the hit man. I don’t have to prove that I was responsible for the assassination to get the money and no-one can pin the crime on me because I paid the hitman in untraceable anonymous electronic cash as well: I’m just the lucky winner of the lottery. If someone else had bet 31st March and murdered the television personality themselves the day before, then it would only have cost me a fiver, and I would have regarded that as a fiver well spent.

This is a rather an old idea that originated, as far as I know, with Jim Bell, who back in 1995 wrote an essay on “assassination politics” that brought the idea to the popular (well, amongst a nerd subgroup) imagination. I suppose it was inevitable that the arrival of digital currency would stimulate thought experiments in this area and it was interesting to me then (and now) because it showed the potential for innovation around digital money even in the field of criminality. If I hire thugs to lure a cryptobaron to a hotel room and then beat him up to get a $1m in bitcoins from him (as actually happened in Japan recently), that’s just boring old extortion. If I use Craigslist to lure a HODLer to a street corner and then pull a gun on him and force him to transfer his bitcoins to me (as actually happened in New York back in 2015), that’s just boring old mugging.

 

Now, as I explained in the FT some years ago, Bitcoin is not a very good choice for this sort of cyber-criminality. It’s just not anonymous enough for really decent crimes or the darkest darknets. Hence my scepticism about the claims that Bitcoin’s long term value will be determined by malevolent money mischief. But as I explained to students at Winchester College last week, if there were to be an actually untraceable cryptocurrency then an assassination market is a much better bet for the coder nostra than the physically demanding felony of kidnapping.

Voter ID is back, and this time it’s in Woking

Well, Woking is in the news. It is going to be part of a pilot scheme at the forefront of the UK’s non-existent identity non-strategy to not introduce a working digital identity infrastructure to our great nation at any time in the foreseeable future The government has decided that voters in five areas in England will be asked to take identification to polling stations at local elections next year, and Woking is one of those areas. The report doesn’t mention just how the entitlement to vote is to be established but we already know what array of high technology machine learning AI super intelligent giant killer robot world brain quantum neuro-computing systems are to be deployed, because local authorities will be invited to apply to trial different types of identification, including forms of photo ID such as driving licences and passports, or formal correspondence such as a utilities bill.

Wait, what? It’s pointless enough showing a trivially counterfeitable physical identity document to someone who can’t verify it anyway, but come on… a utilities bill? That’s where we are in 2017 in the fifth richest country in the world? In Scott Corfe’s recent Social Market Foundation report A Verifiable Success—The future of identity in the UK he highlighted what he calls the “democratic opportunity” for electronic identity verification to facilitate internet voting thereby increasing civic engagement. Well, I agree. But that’s a long way from showing a gas bill to a polling station volunteer.

(And what does ‘local authorities will be invited to apply’ really mean anyway?  They’ve already been ‘invited’ to adopt the national Gov.UK Verify identity service. Very few did, and fewer still continue, so five might be ambitious. And where they do, are we disenfranchising voters who don’t feel like forging documents if they don’t come from the mainstream demographic — a point also made in the SMF report — thus distorting the outcomes).  

Now, I’ve written before that I am in favour of electronic voting of some kind but I’m very much against internet voting, because I think that in a functioning democracy voting must remain a public act and if it is allowed in certain remote conditions then we cannot be sure that a voter’s ballot is either secret or uncoerced. I think it is possible to imagine services where trusted third parties or electoral observers of some kind use mobile phones to go out and allow the infirm or otherwise housebound to vote, but that’s not the same thing as just allowing people to vote using mobile phones. I think internet voting is a really bad idea, but I take Scott’s point about the need for digital identity. However, since we don’t have one and I don’t see any prospect of Government producing a robust one in the foreseeable future, we’re stuck with gas bills until someone gets to grip with issue.

(I should explain here for any baffled overseas readers of this blog that the United Kingdom has no national identification scheme or identity card or any other such symbol of continental tyranny, so our gold standard identity document is the gas bill. The gas bill is a uniquely trusted document, and the obvious choice for a government concerned about fraud. By the way, if for some reason you do not have a gas bill to attest to your suitability for some purpose or other, you can buy one here for theatrical or novelty use only.)

Woking Polling Station

Why is it that the government never ask me about this sort of thing? Since they don’t have an identity infrastructure, why don’t they use other people’s? I would have thought that for a great majority of the population, especially the more transient and younger portion of the electorate (e.g., my sons) social media would provide a far better means to manage this entitlement. I’ve written before that I judge it to be far harder to forge a plausible Facebook profile than a plausible gas bill, so if I turn up at the polling station and log in to the Facebook profile for David Birch (if there is a Facebook profile for a David Birch, incidentally, I can assure you that it isn’t me) then they may as well let me vote.

None of this will make the slightest difference to the central problem, of course, because the main source of electoral fraud in the UK is not personation at the polling station but fraudulently-completed postal ballots, a situation that led one British judge to call it “a system that would disgrace a banana republic”. Indeed, this is precisely what has been going on in my own dear Woking, where four people were jailed recently for electoral fraud. As far as I can understand it from reading the various reports, including the source reports on electoral fraud in the UK, the main problem is that postal votes are being completed by third parties, sometimes in bulk. No proof of identity is going to make any difference to this and so long as we allow people to continue voting by post I can’t see how the situation will improve. So: it is not beyond the wit of man to come up with alternatives to the postal vote. But that’s not what is being proposed. The UK government is not currently proposing an app or any other kind of electronic voting here, it is merely proposing to add a basic test of entitlement at the ballot box.

When this scheme was originally announced, the minister in charge of voting (Chris Skidmore) was quoted by the BBC as saying that “in many transactions you need a proof of ID” which is not, strictly speaking, true. In almost all transactions that we  take part in on a daily basis we are not proving our identity, we are proving that we are authorised to do something whether it is to charge money to a line of credit in a shop, ride a bus or open the door to an office. In these cases we are using ID as a proxy because we don’t have a proper infrastructure in place for allowing us to keep our identities safely under lock and key while we go about our business.

If we are to implement the kind of electronic identity verification envisaged by the Social Market Foundation, then what you should really be presenting at the polling station is an anonymised entitlement to vote that you can authenticate your right to use. It is nobody at the polling station’s business who you are and, in common with many other circumstances, if you are required to present your identity to enable a transaction then we have created another place where identity can be stolen from. The real solution is, of course, not about using gas bills or indeed special-purpose election ID cards, but about introducing a general-purpose National Entitlement Scheme (NES). If memory serves, I think this is what my colleagues at Consult Hyperion and I first proposed in response to a government consultation paper on a national identity scheme a couple of decades ago. Oh well.

Really breaking banks

I can’t stress enough just how big a deal the UK’s transition to Open Banking is. The writer Wendy Grossman posted an excellent piece about this in her “net.wars” series recently. She said, without exaggeration in my opinion, that the “financial revolution” coming here in mid-January has had surprisingly little publicity perhaps because “it’s not a new technology, not even a cryptocurrency. Instead, this revolution is regulatory: banks will be required to open up access to their accounts to third parties”. As Wendy notes in her piece, Wired had a great article about this (written by Rowland Manthorpe) in October. Having talked to some of the key players and examined some of the key concepts, he draws an important conclusion, which is that open banking is not “just a technical fix, or even a solution specific to banking, but a new way of dealing with the twenty-first century’s most sought-after resource, personal data“.

He is spot on. Identity is, as some people maintain, the new money. Banks are about to be transformed from places that store digital monies (which they really don’t anyway, since the proportion of household wealth held in the form of demand deposits has already fallen to minuscule levels) into places that store digital identities. Now, this is hardly a new idea and it isn’t only techno-crackpots like me who keep going on about it. Back in 2014, the Financial Times was reporting that “Britain’s high street banks believe their future role will be as repositories of more than just money: they want to be the safe place where customers store their digital identities”. This makes complete sense as a strategy and as a European Banking Association (EBA) white paper of the time put it, “banks are well positioned” to be a crucial, supporting, positive part of their customers online lives. Banks know this to be the case, they just haven’t done much about it. I still can’t use my Barclays identity to open an account at RBS, much less to log in to Direct Line or Bet365.

Since that FT piece, some people (uncharitable persons, of whom I am not one) have suggested that banks will pratt about and muck it all up and hand digital identity on a plate to Apple, Facebook, Google, Amazon and Microsoft (the GAFAMs). Well, we’re going to start finding out in January, because I can’t help but feel that the major beneficiaries of the regulators pressure to open up the banks will not be nimble fintech startups but the internet giants who already have the customer relationships. Rowland speculates that open banking may expose some institutions to change and to competition that they simply cannot respond to. He even goes as far as to suggest that banks may well fail because of it. This is the sort of thing that they must have been mulling over down at Open Banking Limited, the entity set up to implement open banking in the UK, where the Implementation Trustee, Imran Gulamhuseinwala, “doesn’t seem to have much sympathy for failing banks”.

Now, having met Imran at dinner (with the Russian Ambassador, as it happens) I can confirm that he is one smart cookie (and a very nice guy too). He’s got a point about the competition that open banking should unleash, but when RBS goes under because all of its customers have shifted to Facebook and the bank becomes a low-margin heavily-regulated pipe that is not operationally-efficient enough to compete only on price and service levels, I suspect others may have a different perspective. Either way, I agree with Erik Tak, Head of the ING Payment Centre, who said at Trustech in Cannes this year (below) that the people who will benefit most from this opening up of retail banking will not be fintechs but those GAFAMs mentioned earlier.

Tak at Trustech

Wendy’s words are well chosen. Open Banking is a revolution, and all we can say for sure is that there is going to be change. But as to who the winners and losers are… well, the UK is about to become an interesting, exciting and unpredictable laboratory experiment in banking regulation. In a year or two, we may at least have a signpost to the future of retail banking in place.

Art and science in Bristol

Well, that was fun. I had the great honour of being invited on to a panel at the Festival of Economics, part of the Bristol Festival of Ideas. I’d never been to the festival before, but I really enjoyed it. It’s a very impressive event, and I’m not just saying that because my publisher, Diane Coyle, founded it. What I found especially impressive, apart from the sheer size of the audiences at the sessions I attended, was that the festival seemed to achieve its goal of bringing serious discussion of important topics to the general public. In our session we have a great audience and they gave us a wide variety of topics to deal with in the Q&A. All in all, an excellent event.

Green Room

I was talking about the future of money with Professor Steve KeenDaniela GaborTatiana Cutts and stand-in chair Romesh Vaitilingam who did a great job moving things along. I’m pleased to say that the session was lively and well-attended.

One of the topics that came up, naturally, was whether Bitcoin was a form of cash or not. Remember that US IRS Ruling about Bitcoins being a commodity, so that traders would have to track the buying and selling price of each individual Bitcoin in order to assess their tax liability? No? Here’s a reminder: “the real lesson from the IRS Bitcoin ruling is that for a currency—or any payment system—to work, its units must be completely fungible”. Now, fungible (from the Latin “to enjoy”) is a great word. One of my favourite words, in fact. In this context (ie, money) it means that all of the tokens are the same and can be substituted one for another. You owe me a pound. It doesn’t matter _which_ pound coin that you give me. Any will do. Any pound coin can substitute for any other pound coin because they are all the same: no-one can distinguish one pound coin from another. This isn’t true of Bitcoins. They are all different, and because they are all different, their history can be tracked through the blockchain. As the MIT Technology Review pointed out, while Bitcoin has a media reputation for providing privacy, analysis of the blockchain suggests it could be surprisingly easy for a law enforcement agency to identify many users of the currency. Actually, recent analysis of the blockchain provides much other interesting information, including the fact that around a quarter to a fifth of the bitcoins already mined are lost for good.

The idea of money that isn’t fungible but that can be tracked, traced and monitored reminded me of Nitipak Samsen’s winning entry in the Consult Hyperion 2011 Future of Money Design Award, an example that I include in my book. I used it to make the general point that if you want to look into the future you need to listen to artists as well as technologist. Anyway, I mentioned the Award on stage and a couple of people came up afterwards to ask more about this particular entry and the competition in general, so if you are one of them and you’d like to learn more, check it out here.

Have you ever wondered where the money in your pocket had come from? Who was the previous owner? Who was the owner before that? Might it be a famous celebrity?…

[From Money Trailer – Future of Money]

It is interesting to me to see these different perspectives (Nitipak’s artistic imagination about the bastard child of Facebook and Bitcoin, and the more technical ideas about fungibility) coming together and, to my mind, again illustrates just why the FOM Design Award became such a popular session at Consult Hyperion’s Tomorrow’s Transactions Forum. We (technologists) need artists to help us to imagine alternative futures.

So. TL:DR…

Bitcoin isn’t cash, because cash is fungible. If we want something to be cash, we need to make it fungible. But do we want cash? I’m always ready to listen to informed views, but right now my general feeling is that the costs outweigh the benefits.

Life imitates art, even in payments

A few years ago, I took part in an entertaining event at the British Computer Society (BCS) during which my alter ego, Mr. Don Rogers from the Isle of Man Economic College, set out a new payment system. During this talk (you can see the video here), Mr. Rogers proposed the “Crime Pays System” or CPS. Under this system, 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. This “Light Exchange” is designed to promote an environment of social accountability. The alternative transaction type would be dark. With this option advanced cryptographic techniques would make the payment completely invisible, leaving no trace of the exchange, thus anonymising all transactions. A small levy in the region of 10% to 20% would be paid per transaction. The “Dark Exchange” 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.

Pretty whacky, way-out, left-field thinking, yes? Well, I must in all honesty admit that it was not my idea. Like all such concepts way ahead of their time, it has its origins in art, not technology. The idea came from my good friend and wonderful artist, Austin Houldsworth. As you may know, for many years Consult Hyperion ran the Future of Money Design Award as part of the annual Tomorrow’s Transactions Forum. Austin organised this award and he also designed the cover for my book Before Babylon, Beyond Bitcoin. In fact, here he is showing me the machine that he built for the cover photo of the book.

Welcome to the Machine

 

Well, it’s taken a few years, but Austin’s idea is a few steps closer to reality, since Coin Telegraph reported that just such a payment system is being proposed for Russia. And our guess of a 10-20 percent holding tax was remarkably accurate, since what is being proposed in Russia is apparently a 13% tax.

The CryptoRubles can be exchanged for regular Rubles at any time, though if the holder is unable to explain where the CryptoRubles came from, a 13 percent tax will be levied. The same tax will be applied to any earned difference between the price of the purchase of the token and the price of the sale.

From BREAKING: Russia Issuing ‘CryptoRuble’

That’s pretty amazing if you ask me, but it does illustrate a general point about futurology, which is that sometimes the technologist’s roadmap can be a less accurate guidebook than artists’ imaginations.

Whether we achieve a mostly cashless society sooner or later should be left to technological advancement.

From Should We Move to a Mostly Cashless Society? – WSJ

No, it shouldn’t. This is a matter of great importance and with significant implications for society. The strategy should be set by society, not by technologists. And we need to make some big decisions about it fairly soon, otherwise we will allow technology (that is, technology companies) to create an environment that we may not be comfortable with. What might that environment be? Well, it won’t be like 1984 (for one thing, we didn’t need the government to come around an install screens to watch us all the time, we bought them ourselves from Apple and Samsung and Google). I don’t think it will be like Star Trek either, partly because of the physics and partly because of the money-free utopianism. I think it will be more like the future set out a few decades ago by the “cypherpunk” writers who predate the internet and social media but saw which way the wind was blowing. I’m not the only one who thinks that “we are, roughly, living in the world the cyberpunks envisioned”.

There’s a nostalgia around that word cypherpunk for me, because it’s now many years back I saw these visions and was captivated by them. A quarter of a century ago, my Consult Hyperion colleague Peter Buck and I wrote an article for the “Computer Law and Security Report” (Volume 8, Issue 2, March–April 1992, Pages 74-76), asking whether William Gibson’s work was science fiction or informed prediction (clearly, we thought it was the latter). The article (called “What is Cyberspace” [Ref] [PDF]), which tried to explain the idea of cyberspace to a lay audience (this was before Netscape, the year zero of the modern age, so most lawyers had never been online), turned out to be rather popular. I like to think that one of the reasons was the conviction that we were exploring the actual future, not a hypothetical future. I can’t remember where the idea of the paper came from, but I do remember that we chose extracts from Gibson’s brilliant writing to illustrate the concepts rather than trying to paraphrase, and I still get a thrill from reading them now.

That’s king hell ice, Case, black as the grave and slick as glass. Fry your brains as soon as look at you

[From “What is Cyberspace?”]

I loved the idea of the “black ice” then and I love it now. In the Gibson world, Intrusion Countermeasures Electronics (ICE) refers to security software that protects data form unauthorised access, and black ice is ICE so deadly that it can kill a hacker. Wonderful. It came back to me a couple of years ago when I turned on BBC radio at random while driving home, only to discover that someone was reading one of my all-time favourite books, Gibson’s “Burning Chrome”, and the mention of the black ice gave me that chill all over again.

Writing this blog post I can still remember the shock of reading Gibson’s 1984 masterpiece “Neuromancer” for the first time. (Gibson later called this work an optimistic view of the near future because it assumes only limited nuclear exchanges between countries – let’s hope he’s right.) Why was it such a shock? Well, since leaving university I’d found myself specialising in secure data communications. I worked on one of the first secure LANs for the UK government, on secure satellite communications for banking, on secure military networks for NATO, that sort of thing. I understood computer networks, but I didn’t grok them. I didn’t feel what it meant, where it was taking us.

Reading Gibson back then was like lifting a veil from parts of my own brain. I took an artist to give me vision and vocabulary. And what a vocabulary it was. My very favourite William Gibson quote, right after “the future is already here, it’s just unevenly distributed” is about money. It comes from his novel “Count Zero” and it’s about the cashless society. I re-use it shamelessly in presentation after presentation.

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.

 Use of Cash in Sweden

As I’ve written before, we are heading toward a cashless society, cashless in this Count Zero sense, where cash will still be around and it will still be legal tender (although I don’t think people understand what a limited concept that is), but it will disappear from polite society and from the daily lives of most people. This vision of a cashless society, not a society where there is not no cash but a society where cash is irrelevant, may have seemed outlandish twenty five years ago, but it’s a pretty accurate description of Sweden now (where only a tiny fraction of retail payments are cash)  and China soon. The future is less unevenly distributed than it was even a decade ago.

[An edited version of this piece was posted to Medium, 16th October 2017].

Don’t listen to me, listen to Christine Lagarde

Now, you may think that all this talk about digital currencies is just unhinged techno-determinism when it comes from me, and you can safely ignore it, but when it comes from Christine Lagarde, the head of the International Monetary Fund (IMF) and pillar of the Washington Consensus, you have to take it seriously. In a talk given to the Bank of England conference on “Central Banking and Fintech” (29th September 2017), she said that virtual currencies [by which she means digital currencies in my taxonomy] could actually become more stable than fiat currencies. She says “for instance, they could be issued one-for-one for dollars, or a stable basket of currencies”. This idea of creating a what is strictly speaking a digital currency board is not new and I was interested to see Ms. Lagarde’s mention of a basket of currencies as a viable option. In my recent book “Before Babylon, Beyond Bitcoin” I discuss this as one of the potential futures for money, with reference to the vision of a former Chancellor of the Exchequer. Many years ago, John Major proposed just such an extremely sensible alternative to the euro, which at the time was labelled the “hard ECU”.

The idea of the hard ECU was to have a pan-European digital currency (it would never exist in physical form) but still be accepted in all member states. I am not alone in thinking that this was a missed opportunity. Keith Hart, author of the brilliant “The Memory Bank“, a book about money from an anthropological perspective, wrote that it was a big mistake to replace national currencies with the euro. He further pointed out that the hard ECU would have meant politically-managed fiat currencies alongside a low-inflation alternative, a plural option enjoyed by countries that didn’t join the euro, like Britain and Switzerland. I couldn’t agree with Keith more.

The hard ECU, or as I used to like calling it, the e-ecu was always a better idea than the Euro but when John Major proposed it, he was ignored. He envisaged a cross-border currency for businesses and tourists to use. Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs and no foreign exchange risk and tourists could have hard ECU payment cards that they could use across the continent. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cards — and the cost of replacing them would have been saved.

 Global money

Real Money.

When researching the hard ECU concept for my book, I discovered that the proposal goes back well before Ms. Lagarde and Mr. Major and back into the early days of Margaret Thatcher’s government, in a 1983 report of the European Parliament on the European Monetary System. The proposal was at that time supported across the political and national groups in the parliament, including by the Germans so long as the central bank only concerned itself with stability of the currency (as subsequently transpired). It was taken up by Mrs. Thatcher’s government as a practical single currency for Europe, a means to expand the UK’s financial services industry across a European single market. But it never made it and the later political drive for the euro sidelined it. 

The point is, though, that it was a feasible option and that a digital currency that is backed by a reserve (whether of dollars or some basket of currencies or, indeed, commodities) is a sensible idea. In fact, it’s already being tried in a couple of places. In Kenya, where M-PESA is a private currency backed 1-1 by Kenyan shillings. And in Ecuador, where the government has been trying to launch a Central Bank digital currency. Any Ecuadorian over the age of 18 can open an account for free and transfer money to other people for free. 

An interesting aspect of this otherwise fairly straightforward value transfer system is that is denominated in US Dollars. The US Dollar has been legal tender in Ecuador since 2000, when the post-gold standard “Sucre” was abandoned although, apparently, the “centavo” coins are still in use. This is a practical solution to the big problem of small change under “dollarisation” and most countries that use the dollar still mint local coins: thus, Ecuador uses the dollar as legal tender but mints centavo coins. The government guarantees that anyone who wants to exchange 100 Ecuadorean centavos for a genuine United States dollar can do so. As the economist John Kay noted when he reflected on the coins in his pocket in Ecuador, is in itself an interesting comment on the subject of money. He also pointed out that there is a 50 cent coin minted for the government of Ecuador while the US does not issue 50 cent coins. So “while everyone in the Galápagos or the national capital Quito would accept my 50 cent coin, no one in Washington would”. He went on to note the curiosity that “genuine dollar coins, minted for the US Treasury, have not proved popular in the US but are widely circulated in Ecuador”. It is important to understand that the US Federal Reserve banknotes that are in circulation in Ecuador, stuffed under mattresses in Ecuador and fuelling the less-formal sections of the Ecuadorian economy are in essence an interest-free loan to Uncle Sam. By replacing these with digital currency, the Ecuadorian central bank can reclaim the seigniorage for itself.

All well and good and the ability to transact electronically will also be of the great benefit to the citizens and should cut transaction costs across the economy. If the central bank were to ask the advice of people with knowledge of the creation of a national non-bank mobile payment system (e.g., my colleagues at Consult Hyperion) I am sure that they would be advised to make the system a platform for innovation to encourage entrepreneurs to build local solutions on top of it. The lack of APIs in the initial roll-out of M-PESA was, in hindsight, a mistake and Ecuador could clearly learn from this to capture even more benefits from its transition to digital currency.

Ecuador Demo

 

Unreal Money.

The Ecuadorian Digital Dollar has, I have to say, not been universally well-received. A suggestion for governments thinking of introducing such a system in the future is that it  would benefit greatly from transparent auditing as citizens will not hold the electronic currency unless they are sure that it will remain redeemable at par for US dollars (or other basket of currencies or commodities) themselves. Any suspicion of fractional reserve is disastrous. If the government were to fall prey to the temptation to put more of the digital dollars in circulation than they have (or have the equivalent of) in reserve then, as the Wall Street Journal observed at the time of launch, they will simply be creating doomed electronic assignats that will never obtain traction in the wider economy and Ecuador will be unable to reap the many benefits of its transition away from cash. Christine makes this point herself, saying that the issuing of such a digital currency could be “fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a ‘smart rule’ that might reflect changing macroeconomic circumstances”. I agree strongly: the use of shared ledgers and other such technology may be of maximum benefit in delivering the robustness and availability that a national cash replacement system and the radical transparency that it is required to give people faith in the system.

P.S. In case you see any tweets, newspaper comment or learned articles that refer to the Ecuadorean digital experiment in monetary futures as a “cryptocurrency” please bear in mind that it isn’t.

They are where the money isn’t

When most of us think about bank robbery, we think about people inventing complex derivates and amassing fortunes while the institutions that house them amass fine, bankruptcies and bailouts. But it turns out that your grandparent’s bank robberies are coming back into fashion. American Banker says that violent bank crime has become increasingly less common in the past decade, but that the rate of robberies has ticked back up in recent years.

At first I thought this might be a hipster revolt, like with vinyl records, but that doesn’t seem to be the case. So I’ve no idea. I don’t understand bank robbery. I remember getting into an interesting discussion about bank robbery at a lunch a while back. We were talking about risk and risk analysis. I was trying to make some points about why proper risk analysis like this is a more cost-effective way to proceed than (for example) panicking about newspaper stories on hacking, and that led to a train of thought around cost-benefit analysis for the robber, not the bank. Are robbers put off by thick doors and barred windows and such like? Are robbers deterred by visible, physical symbols of security? Come to that, should be bother with physical security at all in banks?

This is a fair point. So it set me thinking: if you are an amoral sociopath desperate to amass as much money as possible, are you better off robbing a bank or working for it? As a responsible father, I want to help my sons chart the best course for life. Right now, they are at University studying socially useful subjects in science and engineering. Having myself studied science only to become trapped in mortgage serfdom and forced to work until I drop, I am trying to persuade them to become Somali pirates or Wolves of Wall Street, without much success so far. So I understand that side of the equation, but am less certain of the other. Remember that old paper “The Decision-Making Practices of Armed Robbers” by Morrison and O’Donnell. It’s a study of armed robbery in London and one of my favourite papers. It is based on first-hand research (viz, the analysis of over 1,000 police reports and interviews with 88 incarcerated armed robbers).

While it’s about the UK rather than the US, I’m sure the thought processes of the perpetrators must have some similarities. Crucially, the paper notes that “almost all of these robbers evaluated the offence as having been financially worthwhile (aside from the fact that they were eventually caught and punished for their crime)”. So robbing a bank seems like good idea, if you exclude the possibility (in fact, the likelihood) of being caught. I suppose this is standard Jordan Belfort, Bernie Madoff thinking thought isn’t it? Unless people believe they will be caught (and these people don’t) then they only consider the upside.

(One of the interesting snippets it contains is that a great many of the armed robbers in the UK use imitation firearms even though they could have access to real ones. I imagine that in the US the use of imitations is vastly less prevalent, since it’s presumably harder to buy an imitation gun than a real one there.)

So, what to do? While glancing back over the paper I note that the authors say that it doesn’t seem practical to “expect financial institutions and commercial properties to reduce counter cash much more than they already have”. That may have been true when the paper was written a few years ago, but it clearly isn’t true now, since both bank branches and businesses in many countries are becoming cash free. And this is a good thing, because as we all know there is a direct and measurable relationship between the amount of cash out there (more on this later) and the amount of crime. As the paper says, “even when the amount of money obtained was quite small (an element often touted in support of the irrationality of economic criminals), it must be recognised that even apparently small sums may be adequate for the offender’s immediate needs. Hence, gains may be subjectively much larger than they appear”.

Bank robber or management consultant?

 

It’s a stick up

The rewards of armed robbery seem to me, then, as an educated middle-class professional, to be rather low. Yet they are still sufficient to attract the robbers, because their needs are immediate and limited. I want a holiday home in the South of France but the guy in the Nixon mask isn’t robbing a bank to pay his way through college or to obtain seed finance for a start up, he just needs to buy a car or some drugs or whatever. This paper seems, then, to indicate that so long as there is some cash in the till, there will be robberies. This is not an observation confined to banking. A study of the American Electronic Benefit Transfer (EBT) program found that “the EBT program had a negative and significant effect on the overall crime rate as well as burglary, assault, and larceny”.

What they are talking about here are US programmes where benefit recipients are paid electronically and given cards that they can use in shops instead of being given cash. The authors found a 10% drop in crime correlated with the switch to EBT. It seems pretty overwhelming evidence, and even more so if you read the paper, which notes no impact on crimes that do not involve the acquisition of cash. If we can to stop armed robberies, that would surely be an excellent social benefit to the move to cashlessness and would help us to explain the nature of appropriate regulation to legislators.

But back to the specific point about the relationship between bank cash and robberies. With the rewards from robbing banks and businesses falling  armed robbers, like everyone else, follow the money – literally – and so cash-in-transit (CIT) robberies are now the preferred option. We see the same in Europe where countries that have much higher usage of ATMs have much higher CIT robbery rates than countries that have lower ATM usage (see, for example, Sweden and Denmark).

Overall, then, we see another early indication of the emerging post-cash era: Spending on physical bank security is being reduced and spending on virtual bank security is being increased. We do, indeed, live in interesting times.