Oh well. Just had another pointless argument about cryptocurrency and legal tender with someone in another context. The argument was pointless for a couple of reasons…
First of all, the argument was stupid because the person I was arguing with didn’t know what “legal tender” means anyway and, as I’ve already pointed out, it doesn’t mean what a lot of people think it means. Let’s just have a quick legal tender recap, using the United States as the case study. Section 31 U.S.C. 5103 “Legal tender” states that “United States coins and currency [including Federal reserve notes and circulating notes of Federal reserve banks and national banks] are legal tender for all debts, public charges, taxes, and dues”. Here is chapter and verse from The Man commenting on what that means: “This statute means that all United States money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise”.
TL:DR; The Man says no-one can force you to take dollar, dollar bills.
TL:DR; Bitcoin is not legal tender in Japan, nor anywhere else for that matter.
Nor, I strongly suspect, will it ever be. So let’s put that to bed and ask the more interesting question as to whether a central bank digital currency (e$, for short) would be legal tender. Here, I think the answer is unequivocal: yes, and in unlimited amounts, because there is no credit risk attached. A transfer of e$ is full and final settlement in central bank money and in time Section 31 U.S.C. 5013 will undoubtedly be extended to say so.
The British newspapers all reported on the latest figures for current account switching. Here’s an example: “Branch closures, IT meltdowns and vanishing cash machines have forced nearly a million disgruntled savers to ditch their bank and move to a rival in the past 12 months”. Wow. Nearly a million. That sounds like a lot.
But I wonder how many disgruntled customers did that last year? Not so wow. Nearly a million. So, basically, nothing has changed.
In fact the number of people switching accounts, while slightly up on last year, is 9% down on 2016. And the number of people switching is still a fifth down on 2012, the year before the banks were forced to introduce the Current Account Switching Service (CASS, a system which cost hundreds of millions of pounds) to reduce the average time to change bank accounts from around 10 days to a week.
Yes, that right. There are still fewer people switching accounts now than there were before the convenient and user-friendly account switching service was introduced.
Frankly, you can understand why no-one bothers switching. Every bank delivers basically the same service as every other bank, so the number of people switching accounts remains at around 3% of the customer base. And in a sector that is so heavily regulated, the cost of innovation is so high that only the most mass market of new products or services can get into production – it is very difficult to go down a more agile, design-led path.
The headline should have been “Despite everything that banks can throw at them, British bank customers resolutely refuse to move accounts”. This more accurate description of the retail banking landscape appeared, as far as I could tell, only in the Pink ‘Un. In a lovely piece titled “What would it take for you to switch your bank account”, Clear Barrett highlights the specific example of TSB and notes that despite the catastrophic failure of their system and weeks of chaos, only a tiny fraction of the customer base blew them off and switched! They had a net loss of only 6,000 customers (26,000 customers left but – astonishingly – 20,000 joined).
What about the “challengers” you say? Well, first of all, “challengers” is a bad name for what are essentially niche banks. Second of all, what about them? According to the FT, when data analytics company Ogury carried out a study of just over 1.5m mobile users in the UK in the second quarter of this year, it discovered that all of the top ten most-used ‘banking’ apps were from the traditional high-street banks.
So, no-one changes their current accounts (or their savings accounts, which the FCA says gives the big banks a cheap way to fund lending and stifles the “challengers”). But in the future, this inertia will be overcome.
How? Well, as the FT noted, and as I have repeated ad nauseam, “UK bank executives probably aren’t losing too much sleep over fintechs just yet. More likely to have them reaching for the Zopiclone are the US tech giants moving into the payments sector who — somewhat perversely — could end up being the biggest beneficiaries of PSD2″.
What does this mean for account switching? I think it could be very significant indeed. Open banking means that banking services will be delivered by these tech giants acting as “third party providers” (TPPs). The TPPs will manage the relationship with the customer and interact with the banks through application programming interfaces (APIs). The banks will be the heavily regulated, low margin, high volume machines sitting behind those APIs, and the will be selected because of service level agreements and cost/capacity calculations, not because of adverts of spacemen floating down beaches while singing.
The account switching will be done by bots rather than by those customers, disgruntled or not. When I decide to open my Amazon savings account, I’ll never bother to read the small print and find out that the account is actually provided by Barclays. And when Barclays try to charge Amazon a penny more, Amazon will move the account to Goldman Sachs. I haven’t switched my main bank account for 41 years, but I can imagine algorithms changing it for me every 41 days to get the best possible deal on financial services at all times.
According to The Daily Telegraph, “written signatures are dying out amid a digital revolution”. I’m going to miss them. Of course I know that when it comes to making a retail transaction, my signature is utterly unimportant. This is why transactions work perfectly well when I either do not give a signature (for contactless transactions up to £30 in the UK, for example, or for no-signature swipe transactions in the US) or give a completely pointless signature as I do for almost all US transactions.
“Fears are growing that this is potentially leaving people open to the risk of identity theft and fraud as their signatures are more easily imitated.”
If I do have to provide a signature, then for security purposes I never give my own signature and for many years have always signed in the name of my favourite South American footballer who plays for Manchester City. Now it turns out that this is sound legal advice, since according to Gary Rycroft, a solicitor at Joseph A. Jones & Co. it is an increasing problem that people people order things online but sometimes they do not show up so to acknowledge receiving something “I always sign my initials, for example, so I could prove if it wasn’t me” (because, presumably, a criminal would try to fake Gary’s signature).
Now the issue of signatures and the general use of them to authenticate customers for credit card transactions in the US has long been a source of amusement and anecdote. I am as guilty as everybody else is using the US retail purchasing experience to poke fun at the infrastructure there (with some justification, since as everybody knows the US is responsible for about a quarter of the world’s card transactions but half of the world’s card fraud) but I’ve also used it to illustrate some more general points about identity and authentication. My old friend Brett King wrote a great piece about signatures a few years ago in which he also made a more general point about authentication mechanisms for the 21st-century, referring to a UN/ICAO commissioned survey on the use of signatures in passports. A number of countries (including the UK) recommended phasing out theme-honoured practice because it was no longer deemed of practical use.
Well, signatures have gone the way of all things. In April, the US schemes stopped requiring signatures.
They were sort of defunct anyway. According to the New York Times, Walmart considers signatures “worthless” and has already stopped recording them on most transactions. Target has stopped using them too. I completely understand why, but to be honest I think I’ll miss signing for purchases in America.
No more signing Sergio Aquero for US credit card transactions, hello to signing Sergio Aquero for the Amazon lady who calls at my house with monotonous regularity.
If you are interested in the topic of signatures at all, there was a brilliant NPR Planet Money Podcast (Episode number 564) on the topic of signatures for payment card transactions a couple of years ago, in which the presenters asked why were we still using this pointless authentication technique.
Ronald Mann (the Colombia law professor interviewed for the show) noted that card signatures are not really about security at all but about distributing liabilities for fraudulent transactions and called signatures “eccentricrelics”, a phrase I love. His point was that the system doesn’t really care whether I sign my transaction Dave Birch or Sergio Aquero: all it cares is that it can send the chargeback the right way (bank or merchant, essentially) when it comes in.
In addition to the law professor, NPR also asked a Talmudic scholar about signatures.
(The Talmud is the written version of the Jewish oral law and the rabbinic commentary on it that was completed in its current form some time in the fifth century. There are two parts to it: the oral law itself, which is known as the Mishnah, and the record of the rabbis arguing about it and what it meant, which is known as the Gemara.)
The scholar made a very interesting point about the use of these eccentric relics when he was talking about the signatures that are attached to the Jewish marriage contract, the Ketubah. He pointed out that it is the signatures of the witnesses that have the critical function, not the signatures of the participants, because of their role in dispute resolution. In the event of dispute, the signatures were used to track down the witnesses so that they can attest as to the ceremony taking place and as to who the participants were. This is echoed in that Telegraph article, where it notes that the use of signatures will continue for important documents such as wills, where a witness is required.
(The NPR show narrator made a good point about this, which is that it might make more sense for the coffee shop to get the signature of the person behind you in the line than yours, since yours is essentially ceremonial whereas the one of the person behind you has that Talmudic forensic function.)
The Talmudic scholar also mentioned in passing that according to the commentaries on the text, the wise men from 20 centuries ago also decided that all transactions deserved the same protection. It doesn’t matter whether it’s a penny or £1000, the transaction should still be witnessed in such a way as to provide the appropriate levels of protection to the participants. Predating PSD2 by some time, the Talmud says that every purchase is important and requires strong authentication.
So, my interpretation of the Talmud is that it is goodbye to contactless and goodbye to stripe and goodbye to chip and PIN and hello to strong authentication (which may be passive or active) and secure elements: we have the prospect of a common payment experience in store, on the web and in-app: you click “pay” and if it’s for a couple of quid the phone will just figure hey it’s you and authenticate, if it’s for a few quid your phone will ask you to confirm and can use your finger or your face and then if it’s for a few million quid you’ll get a callback for voice recognition and a retinal scan. The same purchase experience for everything: the cup of coffee and the pair of shoes and the plane ticket. It turns out that once again we can go back to the future in the design of our next retail payments system.
No, it isn’t. Bitcoin isn’t legal tender anywhere and it never will be any more than Avios will be (and I’ve bought more cups of coffee with Avios – one – than I’ve ever bought with Bitcoin). Sorry to be a spoilsport again, but to the very best of my knowledge, Bitcoin is not legal tender in any country. Nor, I would wager, will it ever be. Legal tender is an outdated and essentially meaningless concept, which is why I am baffled by the continued discussion of it.
Who knows what “legal tender” means anyway? Pretty much no-one, in my experience. I remember a story about a schoolboy who was chucked off a Welsh bus for trying to pay with a Scottish banknote. The bus company apologised, saying that “Scottish currency is legal tender” which, of course, it isn’t. Scottish banknotes are not legal tender in England or, for that matter, Wales. Only Bank of England notes are legal tender in England and Wales. On which topic, many thanks to @anshumancrypto for pointing me to this…
I hate to spoil the joke but Scottish banknotes are not legal tender anywhere, even in Scotland. In fact, Bank of England banknotes are not legal tender in Scotland either, because Scotland (which has a separate legal system) has no legal tender law although bizarrely (and thanks to Colin Platt for this via Twitter) Royal Mint coins are legal tender in Scotland in thanks to the Coinage Act 1971 (Section 2).
No legal tender notes! Oh my goodness, it must be chaos!
Actually, it isn’t. I’ve been to Scotland several times and I’ve often seen Scots buying things in shops using banknotes, cards and mobile phones. So not having legal tender laws does not seem to be much of a barrier to trade. This shows how uninteresting the issue of “legal tender” really is in the modern age and for decades I’ve tended to assume that any article, tweet or LinkedIn comment that talks about making a digital currency legal tender is written by someone who doesn’t really understand either topic.
I do mean decades, by the way. If I cast my mind back to 2006, I can remember writing one of my first ever blog posts about the Snap Cafe in Georgetown, Washington D.C. This particular establishment had attracted my attention because it had decided to stop accepting cash. This is commonplace for forward-looking eateries today, but then it was a revolutionary act. As I reported at the time, the owner said that it had saved her time and money, meant she didn’t have to go to the bank any more and (most importantly, I suspect) didn’t have to trust staff she didn’t know. That point about trust is a recurrent theme in surveys of retailers and cashlessness: even if they perceive cash to be cheaper than electronic payments, cash has a tendency to evaporate. There was discussion around that time as to whether it was legal to do this, since Federal Reserve Notes (ie, greenbacks) are legal tender in the U.S.A. So, people said (incorrectly) that the cafe owner could not refuse them, and some outraged comment asking whether it was legal to ban cash from an establishment ensued.
Some time later I remember an interesting clarification of the subject of legal tender in a useful paper on Payments and the concept of legal tender by Nick McBride, Legal Counsel, Reserve Bank of New Zealand. The paper described something else that happened many years ago when the coins in New Zealand changed. The new coins were introduced on 1st July 2006. For a period of three months, the old coins were circulating in parallel with the new, but some retailers put up signs saying that they wouldn’t accept the old coins. This, presumably, was because they didn’t want the hassle of having to bag them all up and take them to the bank to swap for new coins. So… could retailers refuse to take the old coins in payment even though they were legal tender?
The answer in both cases was that retailers can refuse to accept legal tender.
Wait, what? So what’s the point of legal tender then?
Well, the point of it is that you cannot force a retailer to accept legal tender (or indeed any other form of tender). If, however, you buy something from them and there is no contractual barrier to the use of any form of tender, and you offer legal tender in payment, and they refuse it, then they cannot enforce the debt in court. That’s what legal tender means: it’s about discharging debts. If you incur a debt you can discharge it with legal tender, but you cannot be forced to incur the debt in the first place, if you see what I mean.
A couple of years later, the European Commission (remember that) put forward its recommendation on legal tender (22nd March 2010). It was, as I recall a banker saying, “strange and undesirable”. So, what is the European perspective? Well, the key points were:
Euro notes and coins are legal tender and retailers can only refuse them for reasons of “good faith” (for example, the retailer has no change).
Retailers should only refuse high-denomination banknotes in “good faith” (for example, if the value of the note is disproportionate to the purchase)
No surcharges should be imposed on cash payments.
Banknotes stained by the Intelligent Banknote Neutralisation System (IBNS) remain legal tender but should be returned to national central banks (as they likely come from a robbery).
Retailers must accept 1 and 2 eurocent coins in payment.
Sensible policies for a better Eurozone, you might think, but you’d be wrong. The essence of these recommendations was that shops will be forced to accept €100, €200 and €500 euro notes and 1- and 2-euro cent coins. Why? Well, because in many countries the shops don’t want them. In some countries (eg, The Netherlands and Finland) the retailers and the public seem to have, in a decentralised fashion, decided to abandon the 1- and 2-cent coins. They are nothing but a hassle and do nothing to assist commerce. At the other end of the scale, retailers in many countries will not accept high-value notes, partly because they don’t want to make change and partly because they are worried about counterfeiting. After all, if you are a corner shop and you get stuck with a bent €500 note then you are €500 out of pocket: the ECB won’t take your counterfeit note and give you a new one. It’s worth paying a few cents to the bank for a debit payment to avoid that risk.
Anyway, apart from people like me, Professor van Hove and the European Commission, no-one much cared about legal tender one way or the other for years after the recommendation until Bitcoin came along, at which point the phrase became rather common. Almost everywhere I see, however, it is being misused (as I hope I have demonstrated). By all means please continue to use it, but please do read up on it first. Legal tender does not mean what you think it means.
As you may know, the United Kingdom leads the world in digital identity infrastructure and is a beacon to the nations when it comes to the use of new technology for identification, authentication and authorisation. Just kidding of course. Here’s the identity that I used at Money 2020 in Amsterdam last week when I was asked to prove who I was at the registration desk:
Yes, the gold standard for identity cards, the Southern Railway photocard, issued only to qualified commuters after rigorous KYC (you give them a photo and then write your name on the card yourself).
The truth is that we don’t have a digital identity infrastructure (or in fact any other form of identity infrastructure) and the shambolic approach to identity is manifest in a daily litany of frauds, frictions and fantasies (often from the government). Here is an absolutely typical example: a nightclub is issuing its own identity cards since it can no longer rely on any of the other forms of “identification” that are in use. The nightclub manager says that the number of people presenting fake IDs is crazy, so the nightclub is going to issue its own identity cards with a picture on them. In order to get one of these cards, customers will need to present “two forms of up-to-date official ID” (not entirely sure what this means, since there is no “official ID” in the UK) and then in order to get into the club, customers will need either one of these club cards or a passport or a driving licence.
I’ve written about this at tedious length before, but the core of the issue is that the identification mechanisms that are in use (e.g., driving licences) are impossible to validate and requiring them to be used at all actually leads to more identity fraud because the analogue artefacts employed are stolen, forged and abused in a variety of different ways stop.
Before I continue with this specific example, let me make a general point about how I think these things should work in an always on, connected world. First of all, retailers and other service providers should all have their own virtual identity, or persona, for every customer because they need to be able to communicate and connect with those customers in order to deliver better services and products. In essence, every customer should have a loyalty card. The contents of that card should be unique to each service provider and any compromise of it should not lead to compromise with other service providers. In a digital identity world, this sort of thing is straightforward. You present a virtual identity from an organisation that is acceptable to the nightclub (e.g., a bank) and they send you back another virtual identity that contains things of relevance to the nightclub, such as your customer number and preferences.
In the virtual world, this makes sense because your mobile phone can store millions or billions of loyalty cards. In the “real” world, it will be really annoying to carry around thousands of loyalty cards with you wherever you go, but when those loyalty cards are (essentially) public key certificates then there is no problem.
So let’s go back to the nightclub and see how they might progress on a digital world, by creating a loyalty card based on digital identity infrastructure. Doing things this way has three distinct advantages. First of all, if you are a nightclub then your bar staff may well not be at MI5 levels when it comes to spotting a fake Romanian passport but they might be able to spot a fake version of your nightclub identity. (In practice, of course, they wouldn’t have to because the validity of the card will be checked by their phones). Secondly, by giving every customer loyalty card you are able to interact with them securely (in technical terms you can always send messages encrypted to that persona). Finally, as the nightclub manager himself notes, “we can also ban people and remove the card at our discretion, giving us more control and creating a safer environment”.
On a commercial note. you might wonder why organisations that already spend a lot of money on working out who people are (e.g., banks) don’t take this sunk cost and transform it into a revenue stream. I’ve more than once been told by a bank that there is no business for providing ID as a service to business customers, when clearly this nightclub (to pick just one example) is perfectly prepared to spend money on creating its own identity service when I’m sure the management would much rather that their efforts be directed towards running a nightclub.
Banks should be looking forwards by creating a digital identity infrastructure and then selling products and services based on the infrastructure to, for example, nightclubs. That way, the nightclubs could produce their own branded app (by adding a skin to a generic multi-bank identity app, for example) and pay the bank a pound to testify to the age of the holder rather than waste money having to do it for themselves.
I once had lunch with Italian anti-euro nationalists. They had invited me because I was in Rome to give evidence on cryptocurrency to a committee in the Italian Parliament and they wanted to ask me about parallel and complementary currencies (yes, really). Here I am in from of the Italian Parliament building, Montecitorio, for the public hearing.
My host for this day was Geronimo Emili (below) from the “War on Cash”. I won’t go into the discussions — they have been covered elsewhere (e.g., here) — but I focused my contribution on the radical and innovative nature of the Bitcoin protocol while remaining sceptical about the potential for Bitcoin as a currency (although I did support the idea that new kinds of currency are around the corner). I think the past four years have reinforced my summary comments to the hearing, which were broadly that Bitcoin is a genuine technological breakthrough and it will cause a revolution, but probably not in payments.
After that, it was off to lunch with (if memory serves) the Deputy Leader of one of the political parties that was in favour of more autonomy for the North. We had a very interesting conversation – through a translator – about the potential for new technology to make regional and city currencies a practical possibility. I’m rather in favour of having more currencies and particularly more currencies that are more closely linked to the values and needs of communities. There is a general argument in favour of a regional approach to currencies in a mobile-phone powered always-on digital age. I first heard it clearly expressed by the late Sir Richard Body MP. Sir Richard was a noted eurosceptic, supporter of an English parliament and, rather famously, one of the “bastards” referenced by John Major. He was also very interested in the theory and practice of money and at the second annual Consult Hyperion Forum (back in 1999) he gave an eloquent explanation as to why regional currencies with floating exchange rates would lead to more efficient resource allocation and more beneficial resource distribution than government transfer payments do.
I think I may have mentioned this at lunch.
Although I thought no more about it at the time, it looks as if I may have inadvertently conspired to destroy the euro, as I now read that the anti-euro Lega nationalists and the alt-Left Five Star Movement are planning to go around the euro and create a rival payment structure based on ‘IOU’ notes. This would subvert the monetary control of the European Central Bank and might well set off a chain reaction in Catalonia, Scotland and perhaps even London.
A while back, the Wall Street Journal ran a story about Amazon being in talks with major banks, including JP Morgan, about building what the Journal referred to as a “checking-account-like” product. This set off a storm of speculation about Amazon moving into the banking business, despite the obvious fact that you don’t need to be a bank to offer such a product.
One of the main reasons for the speculation growing was that consumers seem warm to the idea. Almost half of US consumers surveyed said that were “open” to the idea of Amazon as the provider of their primary bank account (according to LendEDU) which may seem surprising but I think is a reflection on consumer experiences of Amazon in practice. Yesterday I ordered some bottles of sparkling water and some bottles of Coke from Amazon, this morning they showed up. From the time I hit the “buy” button on Amazon I never gave the transactions a moment’s thought. It just works. Some commentators therefore began talking about Amazon becoming a bank. Any why not? They’ve become a book shop! I went into the Amazon store in Austin, Texas, just to buy a physical book from them because I could!
I don’t think they will, though. Why don’t I think Amazon will be a bank? Because, as was said in The Street, “I don’t think Amazon wants to be a bank in the way that JPMorgan is a bank”. Amazon just does not make money the way that banks make money. Look at their existing partnership with Bank of America to lend money to merchants. Amazon don’t care about making some small margin from interest payments, they care about helping merchants to increase Amazon’s overall sales.
If Amazon is going to distribute financial services but not be a bank, then what will it be? I think it’s time for another review of terminology and I’ve got a couple of suggestions. Let’s standardise this way: a “neo-bank” is something that looks like bank, but isn’t (eg, my Simple account when I first got it and before they were taken over by BBVA, which is an actual bank), whereas a “near-bank” is something that performs a function traditionally associated with banks but isn’t a bank and doesn’t look like a bank (eg, Transferwise). In this framework, Amazon would probably become a Neo-bank.
The neo-bank is not a new idea, by the way. In 1997, I wrote, with Consult Hyperion colleague Mike Young, an article for Internet Research (Volume 7, Number 2, p.120-128) called “Financial Services and the Internet”. In that article we wrote about the potential for the new technology to assemble a banking service depending on the customers’ needs explaining how the new infrastructure would allow customers to build their own financial services “with the underlying best-of-breed products originating from a wide range of suppliers” which the manufacturers of financial services (eg, banks) would “retreat to a small range of products that build on core competencies, but supplied to a global market”. Amazon is precisely the kind of organisation that can take these products (eg, unsecured personal credit) to that market.
In Europe, there is nothing that the banks can do to stop Amazon from becoming a neo-bank. PSD2 means that bank customers will give Amazon permission to access their bank accounts, at which point Amazon will become the interface between the customer and financial services. I’ve no reason to doubt Amazon’s potential for success if they go down this route. Time for some thought experiment scenario planning…
If Amazon were to provide something that looks like a checking account but is actually a prepaid account of some kind (as my Simple account was), would people use it? I think the answer to this is a resounding yes, especially if Amazon offer the usual array of discounts or cashback to go with it. They have plenty of margin to trade for data. Look at their credit card that gives you 5% back at Whole Foods, for example. If Starbucks can sit on a a billion (plus) in float just from people buying coffee, imagine the float that Amazon could sit on from people buying… well, everything.
If people begin holding $$$ in Amazon float that gives them a 2% discount on stuff instead of holding $$$ in a bank account that gives them a 0.2% interest rate, funds will begin to drain away from demand deposits pretty damn quickly. Now imagine how quickly that might happen in Europe, where Amazon can use PSD2 to get direct access to customer bank accounts in order to instruct credit transfers to load to Amazon accounts automatically, something like their US Amazon Cash service but using modern electronic instant payments transistors and laser beams instead of Federal Reserve bills. It could be seriously big business.
I was flicking through the New Scientist magazine from 29th November 1956 when I came across a very interesting article on the digitisation of banking, a subject of great current interest. The article has a very useful diagram for those of us who wonder how exactly it is that banks manage customers’ accounts using computers.
I don’t know which bank this is, probably TSB, but in any case it is what the article says about digitisation that I found interesting. Apparently, it’s all to do with something called “ledger management”. The article gives a helpful example, explaining how “when a bank clerk first accepts a cheque, he prints on it with something like a typewriter a note of the amount in magnetic ink, all subsequent operations—sorting, listing and entering in ledgers—can be done without human assistance”.
Reading further on, I discovered that you can have different kinds of ledgers that work in different ways. The author notes that this is only one way of “ledgering automatically” and that the “choice of a system depends on how far was is prepared to go: whether automatic book-keeping is to be done only at head office, whether in this case the accounting for all the branches, or whether branches will have their own equipment or to be grouped around sub-centres”. The same centralisation versus decentralisation of ledgers argument continues to this day.
There’s no point using blockchain, or any other shared ledger technology, to implement these existing processes. The way forward, in banking at least, is to use the new technology to implement new ways of doing businesses. There’s a good argument for thinking that the central co-ordination mechanism for these new ways of doing business might well be trust. Speaking at Davos, way back in 2015, Marc Benioff (the CEO of Salesforce) said that “Trust is a serious problem, we have to get to a new level of transparency – only through radical transparency will we get to radical new levels of trust.”
I could not agree more. I think he is absolutely spot on. This is why I have been focusing on the use of new technologies (and specifically biometrics, blockchains and bots) to create a different kind of financial services infrastructure. I spoke about this earlier in the year and the Digital Jersey Annual Review [YouTube, 24 minutes] and have pushed a similar message out to a number of different audiences since then.
When I talk about radical transparency, I don’t mean it as a vague slogan. I come from the tech side of things, so I interpret it to mean specific technological changes. This is the environment of what I have taken to calling “the glass bank” for short because it is an infrastructure of radical transparency. It is a platform for financial markets that exhibits ambient accountability using translucent transactions with trading built on reputation and regtech. This is an infrastructure that reduces the overall cost of the financial markets that sit on it, thus benefiting the economy as a whole. We finally have chance to build something that looks different to the vision of a bank shown above, so let’s not use all of our amazing new technologies just to simulate what he had back in 1956.
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:
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.
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.
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.
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.
There’s a bit of a row going on about Twitter, Facebook, social media in general and bots. It’s a serious issue. Democracy was invented before bots and doesn’t seem to work terribly well in their presence, so in order to restore peace, low taxes and the tolerable administration of justice we need to do something about one or the other. Many people seem to think that we should do something about bots. The noted entrepreneur Mark Cuban, for example, caused some debate recently by saying that…
It’s time for @twitter to confirm a real name and real person behind every account, and for @facebook to to get far more stringent on the same. I don’t care what the user name is. But there needs to be a single human behind every individual account .
He’s wrong about the real name, because anyone familiar with the topic of “real” names knows perfectly well that they make online problems worse rather than better. He’s right about the real person though. Let me use a specific and prosaic example to explain why this is and to suggest a much better solution to the bot problem. The example is internet dating, a topic on which I am a media commentator. Or at least I was once.
A few years ago, I appeared on a programme about internet dating on one of the more obscure satellite TV channels. They wanted an “internet expert” to comment on the topic and since no-one else would do it, eventually the TV company called me. I agreed immediately and set off for, if memory serves, somewhere off the M4 in West London. The show turned out to be pretty interesting. I didn’t have much to say (I was there to comment on internet security, which no-one really cares about), and I can’t remember much of what was said, but I do remember very clearly that the psychologist at the heart of the show made a couple of predictions. While interviewing a couple who had met online, she said (and I am paraphrasing greatly through the imperfect prism of my memory) that in the future people would think that choosing a partner when drunk in bar is the most ludicrous way of finding a soulmate, and that internet dating was a better mechanism for selecting partners for life. Now it seems that this prediction is being confirmed by the data, as the MIT Technology Review reports that “marriages created in a society with online dating tend to be stronger”.
The psychologist’s other prediction was that internet dating gave women a much wider range of potential mates to choose from and allowed them to review them in more detail before developing relationships. Of course, internet dating also increases the size of the pool for men, but think that her thesis was that men don’t seem to make as much use of this as women do. Anyway, the general point about the wider pool now seems to be showing up in the data, assuming that interracial marriages are a reasonable proxy for the pool size. When researchers from the National Academy of Sciences looked at statistics from 1967 to 2013, they found “spikes” in interracial marriages that coincided with the launch of online matchmaking sites.
Why am I telling you all this? Well, it’s to make the point is that internet dating is mainstream and that is it having a measurable impact on society. This is why it is such a good use case at the sharp end of digital identity. It is rife with fraud, it is a test case for issues around anonymity and pseudonymity, it is a mass market for identity providers and it is a better test of scale for an identity solution than logging on to do taxes once every year. Now, I am not the only person who thinks this and there are already companies exploring solutions. And you can see why they want to: online dating is a huge business. A third of the top 15 iOS apps (by revenue) were dating apps.
So. How to bring the benefits of digital identity to this world. One way not to do it is that Mark Cuban way of demanding “real” names. Last year, the dating platform OKCupid announced it would ask users go by their real names when using its service (the idea was to control harassment and promote community on the platform) but after something of a backlash from the users, they had to relent. Why on Earth would you want people to know your “real” name? That should be for you to disclose when you want to and to whom you want to. If fact the necessity to present a real name will actually prevent transactions from taking place at all, because the transaction enabler isn’t names, it’s reputations. And pretty basic reputations at that. Just knowing that the apple of your eye is a real person is probably the most important element of the reputational calculus central to online introductions, but after that? Your name? Your social media footprint? (Look at the approach of “Blue”, a dating service for Twitter-verified-users-only.)
I don’t think this is a solution, because if I were to be on an internet dating site, I would want the choice of whether to share my name, or Twitter identity, or anything else with a potential partner. I certainly would not want to log in with my “real” name or anything information that might identify me. In fact, this is an interesting example of a market that does not need “real” names at all. “Real” names don’t fix any problem. Your “real” name is not an identifier, it is just an attribute and it’s only one of elements that would need to be collected to ascertain the identity of the corresponding real-world legal entity anyway. Frankly, presenting “real” names will actually make identity problems worse rather than better since the real name is essentially nobody’s business and is not necessary in order to engage in the kinds of transactions that are being discussed here. Forcing the use of real names will mean harassment, abuse and perhaps even worse.
What internet dating needs, and what will solve Mark Cuban’s social media problem as well, is the ability to determine whether you are a person or a bot (remember, in the famous case of the Ashley Madison hack, it turned out that almost all of the women on the site were actually bots). On Twitter it’s not quite that bad yet, because there are still many people posting there, but with bot networks of 500,000 machines tweeting and re-tweeting it is not in good shape. The way forward is surely not for Twitter to try and figure out who is a bot and whether they should be banned (after all, there are plenty of good bots out there) but Twitter to give customers the choice. Why can’t I tell Twitter that I don’t want bot followers, that I want a warning if an account I follow is a bot, that I don’t want to see posts that originated from bots that I don’t follow and so on. Just as with internet dating, the problem is not real names but real people.
Now, working out whether I am a person or not is a difficult problem if you are going to go by reverse Turing tests or Captchas. It’s much easier to ask someone else who already knows whether I’m a bot or not. My bank, for example. So, when I go to sign up for internet dating site, then instead of the dating site trying to work out whether I’m real or not, the dating site can bounce me to my bank (where I can be strongly authenticated using existing infrastructure) and then the bank can send back a token that says “yes this person is real and one of my customers”. It won’t say which customer, of course, because that’s none of the dating site’s business and when the dating site gets hacked it won’t have any customer names or addresses: only tokens. This resolves the Cuban paradox: now you can set your preferences against bots if you want to, but the identity of individuals is protected.
One of my acid tests of whether a digital identity infrastructure is fit for the modern world is whether it can offer this kind of strong pseudonymity (that is, pseudonyms capable of supporting reputations). If we can construct an infrastructure that works for the world of internet dating, then it can work for cryptocurrency, cars, children and all sorts of other things we want to manage securely in our new always-on environment. We have to fix this problem, and soon, because in the connected world, if you don’t know who IS_A_PERSON and who IS_A_DOG and who is neither, you cannot interact online in a functional way.