Transactions, hoards, stashes and exports

In 2016, 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”. This seems puzzling, considering that this year the UK will see 13.4 billion debit card payments (of which a third will be contactless) but only 13.3 billion cash payments (according to PaymentsUK).

 Studio 34

Now, as it happens, Victoria and I were both guests on the BBC’s flagship personal finance programme Moneybox last month [you can listen to the show here]. We’d been invited to take part in a phone-in about the trend to the cashless society, along with Andrew Cregan (Head of Payments Policy at the British Retail Consortium). The topic had been triggered by the head of the Swedish central bank calling for a pause in Sweden’s rush to cashlessness. At the end, Victoria and I rather agreed on the need to have a strategic conversation about cash at the national level. The issue in Sweden is that cashlessness is just happening: it’s not part of a plan that addresses the issues associated with a cashless economy (eg, inclusion). In the UK, we can learn from this.

But back to the steady growth in notes “in circulation”. The trend growth of cash in circulation running ahead of GDP growth isn’t a UK phenomenon. The amount of cash “in circulation” around the world has gone from 7% of GDP in 2000 to 9% of GDP in 2016.  On the show, I couldn’t resist an oblique snark about what these notes being used for (ie, money laundering, tax evasion and so on) since they aren’t being used to buy things.

That’s right. Banknotes, statistically, not being used to buy things. Cash is no longer primarily a means of exchange. 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. Not “rarely”. Not “infrequently”. Never. The notes are not in circulation at all but are stuffed under mattresses.

Similarly, 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 for payments 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 Victoria said that only about a quarter of the cash the Bank puts into circulation is for “transactional purposes”. I wrote a comment piece on it for The Guardian at the time, so I thought it might be interesting to review and update my comments using the Bank of England’s four-way categorisation of the demand for cash, which is that cash is required for:

  1. Transactions. Here the trends are clear. Technology is a driver for change but that the impact is weak. In other words, new technology does reduce the amount of cash in circulation, but very slowly.

  2. Hoards. These are stores of money legally acquired but held outside of the banking system, like the 300 grand that Ken Dodd used to keep in his loft. 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.

  3. Stashes. These are stores of money illegally acquired or held outside the banking system to facilitate criminal behaviour. 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 crash, 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 seemed 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 that Guardian piece by the way), both of which serve to reinforce the contribution of cash to the shadow economy.

  4. Exports. 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 at lot of these notes are going into stashes.

If, as I strongly suspect, the amount of cash 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. Cash makes the government (i.e. us) considerably worse off. In summary, therefore, I think think that the Bank’s view on hoarding is generous and that it is the shadow economy fuelling the growth in cash “in circulation”. Hence my point that it is time for Bank of England to develop an active strategy to start reducing the amount of cash in circulation, starting with the abolition of the £50 note as well as the ending the production of 1p and 2p coins (almost half of which are never used in a transaction before being returned to the banking system or simply thrown away).

As it happens, the future of those coins and that note are the subject of a current HM Treasury “consultation”. I urge all you of sound mind to reply to the consultation and hasten their abolition here.

Germany is an outlier

The G4S World Cash Report came out and I was e-leafing through it when it struck me once again just how much Germany is an outlier when it comes to retail payments. The average German wallet contains 103 physical euros, the European Central Bank (ECB) estimated last year, more than three times the figure in France. Bloomberg says that cash is used in 80% of German point-of-sale (POS) transactions, compared with only 45 percent—and falling fast—next door in the Netherlands. I think they must mean 80% by value because the FT says that 48% of retail transactions are in cash (down from 58% a decade ago).

Perhaps it is that Germans are just naturally conservative people. The Roman historian Tacitus (55-117CE) wrote in his history “Germany and its Tribes” that the barbarian inhabitants of that land had traditionally exchanged weapons, slaves, cattle, women and such like to settle up between themselves but that the Romans had introduced them to money. Having changed their medium of exchange once in the last two millennia, perhaps they just don’t want more change for change’s sake. Or perhaps there is another explanation. The use of cash in retail is falling slowly and we all know that Germans prefer to keep some of their money as cash at home rather than in the bank, maybe much of the cash “in circulation” there just isn’t.

Given the suspicion that much of the cash in Germany is stuffed under mattresses rather than circulation in the economy, it was still rather surprising to hear from the Bundesbank that nine in ten of the euro banknotes that they are are never used in transactions. That’s right: nine in ten. Approximately all of the cash printed in Germany is never used. Not rarely, not occasionally, but never. So this led me wonder whether this huge volume of never used banknotes are in “hoards” (that is, legitimate money held outside of the banking system) or in “stashes” (that is, illegitimate money held outside of the banking system). Can it really be that the German predilection for holding some of their money in the form of cash account for these billions of euros in inert paper money?

Well, because of the current unusual circumstances with respect to interest rates and so forth, it’s certainly a plausible hypothesis. The European Central Bank (ECB) interest rate for bank deposits is currently minus 0.4%. Conventional economic theory would predict that at a minus rate, depositors would prefer to hold cash rather than pay the banking system to look after their money for them.

(One of the reasons why economists are interested in getting rid of cash is in order to allow the interest rates to go further into negative territory in order to stimulate economic activity over hoarding.)

Now, it clearly costs something to manage cash over and above the cost of managing an electronic deposit hence it is interesting to speculate what the German “crossover” negative interest rate might be, the modern version of the old “specie point” at which it was cheaper to hold bullion for monetary purposes rather than paper instruments.

The current negative interest rate cost German banks about a quarter of a billion euros per annum. The Bavarian Savings Bank Association sent around a circular to their members some time ago setting out their calculation of the crossover rate, which they calculated as something like -0.2%, or half of the current negative rate. However, as I wrote at the time, this isn’t really a serious calculation because, as it says at the end, it doesn’t take into account the significant costs of cash in transit (CIT) or the additional security expenditure that would be needed to guard cash hoards. But it does make a fun point, at least to me, which is that the existence of the €500 notes has an impact on that crossover rate. Now that the ECB has decided stop printing the 500s, banks will have to store masses of 200s, so the cost of storage and transport will be higher (which, in turn, will put a premium on the 500s in circulation so that they will trade above par). Just as an indication, two billion euros in 200 euro notes weighs about 11 tonnes.

While that calculation may not be complete, it does make the interesting point that although we have passed the crossover point already, no banks have to date decided to store their squillions under the mattress rather than leave them on deposit. It seems to me therefore that Bavarian estimates must be too low and that the costs of transport, security, insurance and so on are actually quite high, so the ECB will be able to push interest rates further negative before it gets close to a genuine crossover point that would see banks investing in larger mattresses.

Trading and hard currencies

Talking about central banks and digital / crypto / virtual (* delete where applicable) currency, I was interested to read (in the Russia Today Business News) of an initiative to create a joint digital currency for BRIC countries and the Eurasian Economic Union (EEU) that has been proposed by the Central Bank of Russia, according to its First Deputy Governor Olga Skorobogatova. She is reported as saying that “The introduction of a national digital currency seems to us not entirely justified from the point of view of macroeconomics” (presumably because as Russia is still quite cash-intensive the costs might not be justified and the benefits too concentrated). I can see why the alternative suggestion of a cross-border digital currency set up between trading partners would have much wider benefits.

This is not a new idea. As I discussed in my book “Before Babylon, Beyond Bitcoin“, some years ago the then-Chancellor John Major proposed a similar concept as an alternative to the euro which at the time was labelled the hard ECU (and ignored). The hard ECU would have circulated alongside existing national currencies. It would be used by businesses and tourists. It would never exist in physical form but still be legal tender (put to one side what that actually means) in all EU member states. Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs, tourists could have hard ECU payment cards that they could use through the Union and so on. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cheques and cards — and the cost of replacing them would have been saved.

Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs, tourists could have hard ECU payment cards that they could use through the Union and so on. 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.

(As an aside, it wasn’t John Major’s idea. It had it’s origin a few year before in a 1983 report of the European Parliament on the European Monetary System, the EMS. The proposal was supported at the time across the political and national groups in the parliament.)

The idea of an electronic currency union to facilitate international trade has new resonance. While Bitcoin captures the media attention, there are a great many other possibilities: new community currencies, brand-based plays, commodity baskets and goodness knows what else. All of these make it an exciting time to be in the electronic money business, but they also make it unpredictable, which is why it is fun. As I say in the book, we’re not looking at a world in which some kind of new global currency takes over, but a world in which a great many communities choose the currencies that are most efficient for themselves. At it happens, one of those communities could be the European Community! Noted political theorist Marine le Pen herself has said that she could see the EU setting up another currency “like the ECU”. I’m sympathetic, obviously, because the idea of restoring the Franc while simultaneously creating a new pan-European currency makes economic sense.

If anything, however, Ms. le Pen’s proposal is not really that radical. Why have nation-state control over money at all? Why not allow regions to have their own currencies? Why not use Normandy Money? Why not have pan-national currencies? Or Islamic e-Dinars? I’m on the same page as “The Futurist Magazine” here. In September 2012, as part of a compilation of pieces about life in 2100, they said that it is quite likely that we will still have money in 2100, but it may not be issued solely by nation states. I couldn’t agree more.

Madame First Deputy Governor Skorobogatova is, incidentally, far from alone in wondering about new digital currencies at this level. Christine Lagarde, head of the International Monetary Fund (IMF), gave a talk on “Central Banking and Fintech” in September last year in which she said that digital currencies (of the kind proposed by Madame Deputy First Governor) could actually become more stable than fiat currencies. She says that they could be issued against “a stable basket of currencies” ( a hard SDR?) but I would extend that suggestion to a token based on a basket of commodities (or, indeed, a mixture of both) or some other “root” with long-term stability.

It’s one thing to have crackpot technologists such as me talking about augmenting and perhaps even replacing national currencies, but when people who are actually in charge of money start speculating about the same, then you do have to suspect that some things are about to change.

The campaign against extreme cash is gaining momentum

I’m veery much in favour of getting rid of “extreme cash”. What I mean by this is cash at the extremes of the value range: the small coins and the big notes. In the UK, this means getting rid of the coppers and the largest banknote. So… hurrah! I read that the UK government is considering phasing out 1p and 2p coins, as well as £50 notes, in a bid to tackle tax evasion, money laundering and waste.

Since I’ve been going on about this for more than two decades I’m delighted to see that the government is finally coming around to my way of thinking. I read some newspaper reports that the government is to begin consultations on the subject, but I haven’t heard from them yet and I can’t imagine who else they might consider asking, so I stand ready to answer the nation’s call when as soon as it comes.

The issue of coins is a no-brainer. Back in 2014, I asked whether it is in the interests of the economy as a whole to continue to produce these small coins, saying that “I have no idea why the Royal Mint are messing about wasting our money on making 1p and 2p coins that nobody uses any more. It’s about time we recognised low-value coins for what they are. Scrap metal”. Five years ago I pointed out that in many countries, merchants and consumers alike had simply given up using small coins (such as the one- and two-cent euro coins) whether the mints produced them or not. When Nigel Lawson abolished the old halfpenny in 1984 it had a purchasing power close to the current 2p and there was no contactless. So I fully expect to see the 1p and 2p vanish, and if the government caves to the metals lobby to perpetuate them, which case I will be outraged.

I think the consultation around the £50 note will be more interesting, since there is “a perception among some that £50 notes are used for money laundering, hidden economy activity, and tax evasion”. I’ll say there is. Of the £ billions of notes and coins “in circulation” in the UK, which were in 2016 growing at 5.7% in a year when the economy grew by about 1.8% and the use of cash in retail transactions (retail spending grew 5.2%) was overtaken by the use of electronic payments, a fifth is in the form of £50 notes, which you never see in polite society. As I have discussed exhaustively and on many occasions, only about a quarter of the Bank of England’s notes are used for transactional purposes so these £50 notes must be disproportionately concentrated in the non-transactional (i.e., largely criminal) uses. As everywhere else, high-value banknotes are a major cause for concern. So why not make crime, terrorism, drug dealing, money laundering and bribing corrupt politicians marginally less convenient and marginally more expensive by getting rid of high-value banknotes? It is not only deranged digital money deviants like me who think this is right path to take, by the way. This kind of thinking is beginning to percolate up to the higher echelons of the financial establishment. Mario Draghi, European Central Bank president, told the European Parliament that “we are determined not to make seigniorage a comfort for criminals”. By which he means that the stack of £50 notes underneath the Mafia boss’ pillow are earning interest for the British government. The government is, in a very real sense, living off of the proceeds of crime.

Now, I’m not so stupid that I think that getting rid of the £50 will stop crime! If the government drops the £50, then the criminals will carry on using the $100, €200 and the worst offender, the Swiss Franc. Sooner or later the law-abiding nations of the world will have to institute sanctions against the Swiss. When I last went to Switzerland and I never saw a CHF note or coin: I used cards everywhere, and as far as I could see so did everyone else. Yet Switzerland has a CHF1,000. That’s right: a banknote worth $1,000. And you can spend it, too. Mind you, the Swiss have been cracking down: since 2016, you have had to show ID (how they verify the ID is beyond me) for cash transactions of $100,000 or more (Charles Goodhart, a former Bank of England policy maker, said this limit was so high that it could only be described as a joke).

Am I taking crazy pills? The Bank of England, the Swiss National Bank, the European Central Bank and the Federal Reserve should not be competing to be the currency of choice for Mexican drug lords, Albanian people traffickers and Syrian terrorist groups. So yes, let’s ditch the £50 but let’s also spearhead an international campaign to add morality to the cash issue and reduce the maximum value of the circulating medium of exchange to EUR 50, USD 50 and CHF 50. If the central banks won’t do it, then we should prosecute their governors for conspiracy to support money laundering. 

Digital identity cards, not digitised identity cards

You all know who Marshall McLuhan was, right? And that he predicted not only the internet but its impact on society

Born in Canada in 1911, McLuhan studied at the University of Manitoba and University of Cambridge before becoming a lecturer at the University of Toronto. He rose to prominence in the 1960s for his work as a media theorist and for coining the term “global village”, which was a prescient vision of the internet age.

Half a century ago, he said of the networked world he predicted that “In the new electric world, where everybody is involved with everybody, where everybody is involved in complex processes, the old identity cards, the old means of finding out who am I, will not work”. I wish that more people would take this on board, give up trying to digitise the old identity systems and start building the new digital identity system we need.

Here’s an example. I notice (via my friends at One World Identity) that the Australian state of New South Wales is soon to provide citizens with “digital driver’s licenses, stored on a user’s smartphone, allowing them to ditch their physical ID card”. I read that article and it seems to me that these aren’t digital driver’s licenses or anything like them. They are digitised driver’s licences, nothing more than virtual shadows of their mundane progenitors. They have no functionality beyond their heritage in industrial age bureaucracy and provide absolutely nothing new to the new economy.

We need digital identity, not digitised identity, a point I intend to make loud and clear in Washington on 26th and 27th March, where I will be chairing the 2nd KnowID conference. And I’ll be talking about McLuhan, because McLuhan had this notion of identity as smeared across entities, depending on the relationships and interactions between identities (what Ian Grigg calls “edge” identity). If this is indeed the correct vision for post-industrial online identity (and since he was right about most other things, I’m certainly not going to call McLuhan out on this one) then what would it mean for the driving licence?

Well, I (and others) have long argued that shifting to an infrastructure where transactions are between virtual identities and enabled by credentials is the way forward. Hence the right way to see a driving licence is as a bundle of credentials. How would we use those credentials? To make claims that we need in order to enable the transactions. In Phil Windley’s “Self-Sovereign Identity and the Legitimacy of Permissioned Ledgers” he says, if I interpret him correctly, that a claim is the process of providing a credential and authenticating its use in order to obtain authorisation. I like the “claims are processes” way of thinking and it seems like a reasonable working definition, so let’s move forward with that, using my favourite Three Domain Identity (3DID) as the framework.

 The Three Domain Identity (3DID) Model

The attributes that are needed in the Authorisation Domain might be very varied, but for sake of the discussion, let’s assume that in the case of the driving licence there are three claims that should be supported:

  • A policeperson might need to know who you are.

  • A car rental company might need to know that you are allowed to drive.

  • A bar might need to know that you are over 18.

Now the digitised driving licence doesn’t know who is asking, what they are asking for, or whether they are allowed to ask for it. So it shows everybody everything and (in the general case) they have no idea whether any of the claims are true or not. But a digital driver’s licence could know all of these things. So when the policeperson asks your digital driving licence who you are, your digital driving licence can check the digital signature of the request and the authorisations that come with them. The digital driving licence knows that the bar can ask if you are over 18, but not who you are because it’s none of their business – although the licence may return a service provider-specific meaningless but unique number (MBUN) that the bar can use for loyalty (and barring). I cannot stress just how much of a new idea this is not. A decade ago John Elliot, Neil McEvoy and I wrote a chapter called “This Is Not Your Father’s ID Card” for the book “Digital Identity Management”. In it, we said that:

Because computers, biometrics and digital signatures can work together to disclose facts about someone without disclosing their full identity. Your ID card could, for example, send a message to a machine confirming that you are over 18 without disclosing who you are or what your citizen number is.

I’m sure we were not the only people to have realised this. The problem then, and now, is that the people in charge of identity cards, and driving licences, and passports and all of the other identity infrastructure, still see these documents only as dumb emulations of paper and not as what they are: nodes in an identity network. They are nodes and our identities, to go with Ian’s formulation, are the edges between them.

All very well, I can hear you saying. All very nice in theory. But what about deployment? How would will you connect up all of the bars and car rental counters and police cars and so on. What would the person in the bar use to interrogate your digital driving licence? Well, their digital driving licence of course! Surely one of the defining characteristics of the digital age driving licence that has a computer in it and is now a node is that… it can talk to other driving licences. There is a beautiful symmetry to this: no digital driving licence is different from any other digital driving licence, nor privileged above any other digital driving licence. No need to for custom equipment. Every has the same digital driving licence – you, the cop, the barman – but these licenses are loaded with different claims.

So this is how Phil Windley’s claims work in practice then: I want to get a drink so in the Authorisation Domain the barman sets his digital driving licence (a smartphone app) to request a claim for IS_OVER_18 and then via NFC, Bluetooth or QR code interrogates my digital driving licence (a smartphone app). My smartphone app sees that his request is signed by a valid licensing authority and has not expired and checks what credentials it has to hand. It discovers two virtual identities containing the relevant IS_OVER_18 attribute: one from the Driving License Authority and from my car insurance company. It selects the first one and sends it to the barman’s app.

(The virtual identity contains a unique identifier, a public key, a number of attributes and a digital signature.)

The barman’s app checks the signature and recognises that it is valid. Since the barman is using his smart driving licence app it either stores or has access to the public keys of the driving licence authorities, car insurance companies, car rental companies and so on. My smart travel app would have similar information for airlines and car rental companies, hotel companies an so on. The barman’s driving licences sends back a message encrypted using the public key. My app can decode this, because it has the corresponding private key, so in the Authentication Domain it asks for me to authenticate myself. I use my fingerprint or PIN or whatever and the app decodes the message. Then it replies to the barman’s app. The barman’s app now knows that I have the corresponding private key and thus it can accept that IS_OVER_18 applies to me.

The claim as process – I want to see a virtual identity that contains a credential that includes this attribute / here is a suitable credential / OK, so prove it is yours / here you go, I decoded your message / Thanks, now I’m happy to serve you – delivers both security and privacy and shows that we use digital identity to create an infrastructure that goes far beyond emulating our broken physical industrial age identity system to provide something so much better,

It’s time to move on from the cardboard age to the communication age, and I hope that you’ll join me at KnowID to discuss all of that latest developments in the digital identity space and to formulate practical strategies for making the long-overdue change to digital identity in the mass market, whether centralised, decentralised, federated or whatever else might work. 

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.