Get your Bristol Pounds here

Bristol is a great city in the west of England. It was the big city to me, because I grew up in Swindon, some 40 miles away from this metropolis, and can well remember visits to its attractions. These included an ice rink and the Colston Hall, where I saw the first ever performance by a popular beat combo for which I saved good money and paid for the ticket myself. It was the Sensational Alex Harvey Band, fronted by the eponymous hard-drinking Glaswegian and featuring theatrical lead guitarist Zal Cleminson. What a band! Their music will be continue to be celebrated the length and breadth of the land when Ed Sheeran is nothing more than a wikipedia footnote in the history of Soma-music for the masses. But I digress.

These days the city, while famous for its excellent University and other cultural attractions, is more noted for its contribution to the evolution of next-generation money, being the home of the Bristol Pound (the B£). Here’s a B£ fiver, accepted at par at a number of local merchants. The notes are lovely: this one features art from local children.

Bristol Pound

Now, while the notes are lovely, they have one distinct feature that sets them apart from the Bank of England’s rival product: they carry an expiry date. I think this might be something to do with the law of the land and crude attempts to maintain the Bank’s monopoly over currency rather than an economic calculation about hoarding, but nonetheless it does mean you’d be unwise to stuff them under your mattress and forget about them. If you get one, get out and spend it.

Bristol Pound

The B£ has been around for a few years. It’s made the jump from paper currency to digital currency already and if you download the B£ app, then you can pay with it at a number of local businesses. Those businesses can also transfer money peer-to-peer within the system to pay their suppliers. I didn’t get a chance to try this out because to get a B£ account you have to have a Bristol postcode so I shall harass some poor student into to trying it out for me and report back. Meanwhile, here’s the app in action at the Watershed Cafe.

Bristol Pound

So why am I writing about the B£ now? Well, the B£ is about to undergo a pretty revolutionary change. To understand why, first recall that strictly speaking while the B£ has some characteristics of a currency (you can pay your council tax with it, for example) it isn’t an independent currency. Rather, it is a form of “currency board”, an arrangement that provides for a fixed exchange rate against some other currency. The B£ in circulation are backed by a 100% reserve held in another currency. In this case, the other currency is Sterling. That Sterling is sitting in an account at the credit union. So far, so Ecuadorian.

Talking about Sterling, you’ll recall that almost all of the Sterling in existence (well, 97% of it) was created as bank credit. This happens when you pop down to, say, RBS to borrow ten grand to buy a car. At this point RBS just invent the ten grand out of thin air on a spreadsheet somewhere and add it to your account. You then send his imaginary money through the faster payment service (FPS) to the car dealer and it ends up in their account. They pay some out in wages and it ends up in employees accounts. Some of those employees deposit it in the RBS and so on and on. I know it sound implausible, but I can assure you that it’s true: our money is just made up.

B£ don’t work this way. Right now, if you could go to the credit union to borrow B£, then could only lend you the B£ that they had received as a deposit from savers. This autumn, however, B£ are going to become real money, in the sense that they are going to start making the stuff up and lending it to small businesses in the community. The loans will be made in B£ and will be repayable in B£.

Bristol Pound

I’m very interested in the world of complementary currencies and am always curious to see new experiments in the field. In Meyer and Hudon’s paper on “Money and the Commons: An Investigation of Complementary Currencies and their Ethical Implications” at the Solvay Brussels School of Economics and Management (May 2018), they distinguish between “social commons” and “commercial commons” as frameworks for new kinds of money and these categories broadly correspond to the notions of private currency and community currency that I explore in “Before Babylon, Beyond Bitcoin”. The B£ is born in the social commons and is intended to stimulate economic activity with its community.

I used to be sceptical about this kind framework and much more interested in the commercial framework because a collection of interlinked community currencies seemed to me less economically efficient in aggregate. I still think this is true, but it may not be the point. I’m wondering if we may need to explore ways to increase economic activity within communities at the expense of inter-community transaction costs as a response to inequality and the unrest that it may cause. This has implications, because (as I wrote for Quartz recently) if communities rather than individuals become central to money creation then these currencies will be imbued with the values of the communities that create them.

This will be a really interesting experiment to see if a social currency can genuinely stimulate a local economy and, as I am very interested in the specific example of city-based social currencies because of my feeling that communities have some role to play in the future of digital money, I will be following the B£ credit experiment with interest and will report on its progress in due course.

Incidentally, I do feel bound to mention one obvious improvement that might be made to the app. I think a button to add a tip might be usefully provided.

Bristol Pound

By the way, I happen to have three of the lovely Bristol tenners on my desk even as I write and I will cheerfully hand them to the first three people who ask for them in the comments below so that they can visit that lovely city and try out some new money for themselves.

Happy Birthday Credit Card Industry

Today is a very important day for us payments nerds. It’s the 60th anniversary of the “Fresno Drop”, the birth of the modern credit card industry. On 18th September 1958, Bank of America officially launched its first 60,000 credit cards in Fresno, California, setting in motion an experiment that changed the American way of borrowing, paying and budgeting.

And, in time, changed everyone else’s way of doing those too.

If you want a good introduction to the history of the credit card, from the Fresno Drop up to the Internet, I’d recommend Joe Nocera’s “A Piece of the Action“, which I read many years ago and still pick up from time to time.

If you want to spend five minutes having a quick look at where the modern credit card business comes from, here’s the short version (courtesy of CNN Money)The most extraordinary episode in credit card history is the great Fresno Drop of 1958. The brainchild of a Bank of America middle manager named Joe Williams, the “drop” (which is marketing-speak for “mass mailing”) was an inventive tactic to give Americans their first highly addictive taste of credit card living. Keep in mind that charge cards in those days–like Diners Club or American Express–were mainly used by jet setters, businessmen on expense accounts, and ladies who lunched… Williams wanted to change that. In September 1958, he mailed out 60,000 credit cards, named BankAmericards, to nearly every household in Fresno. Mind you, these cards arrived in the mailboxes of people who had never seen–let alone applied for–a card like that. But now thousands of ordinary people suddenly found that thousands of dollars in credit had literally dropped into their laps…

There you go. Now you can go ahead and bore at least one person today with the story of the Fresno Drop. I know I will.

As you might expect, I cover this episode in my book Before Babylon, Beyond Bitcoin, where I point out that what is sometimes overlooked from our modern perspective is that the evolutionary trajectory of credit cards was not a simple, straight, onwards-and-upwards path. For the first decade or so, it was far from clear whether the credit card would continue to exist as a product at all, and as late as 1970 there were people predicting that banks would abandon the concept completely. What changed everything was a combination of regulation and technology: regulation that allowed banks to charge higher interest rates and the technology of the magnetic stripe and Visa’s BASE I online authorisation system. This changed the customer experience, transformed the risk management and cut costs dramatically while simultaneously allowing the banks to earn a profit from the business.

It looks more than a decade for the Fresno drop to turn into the mass market business, integral to the economy, that we know today. So what financial technology experiment of our days will be of similar magnitude a decade because of regulatory and technological change a year from now? My guess would be something to do with tokens, but I’d be curious to hear yours.

Tokens and Twincoins

For some time – since when I first began jotting down an outline for my last book, in fact – I have been boring clients, colleagues and carvings senseless with my mantra that while Bitcoin isn’t the future of money, tokens might well be. What’s more, as I have presented more than once, those tokens will have an institutional relationship with “real world” assets. Now I see that none other than noted cryptocurrency investors the Winklevii have launched just such as product. Gemini Trust, their cryptocurrency exchange, has won approval from New York finance regulators to launch Gemini Dollars.

These are tokens on the Ethereum blockchain that are pegged in value to the U.S. dollar (in other words, they are kind of digital currency board). State Street Bank will hold the reserve of one greenback for every token issued and, I assume, they will be redeemable on demand and at par.

Now, I know nothing about entrepreneurhip or venture investing or creating cryptoasset trading platforms, but I think they are on to something. Many people will want to hold dollars as digital bearer instruments rather than as a bank balances. When my smart contract sends a Gemini dollar to your smart contract, that’s pretty much that. It’s inexpensive and fast.

This idea of using cryptocurrencies to support tokens linked to something in the real world is hardly new. But it’s becoming something of a focus now. Kevin Werbach published a very good article about tokens on the Knowledge @ Wharton site recently. He set out a useful taxonomy to help with discussion and debate around the topic, saying that

  • There is cryptocurrency: the idea that networks can securely transfer value without central points of control;

  • There is blockchain: the idea that networks can collectively reach consensus about information across trust boundaries;

  • And there are cryptoassets: the idea that virtual currencies can be “financialized” into tradable assets.

I might use a slightly different,  more generalised approach (because a blockchain is only one kind of shared ledger that could be used to transfer digital values around), but Kevin summarises the situation exceedingly well. His perspective is that cryptocurrency is a revolutionary concept but the jury is still out on whether the revolution will succeed, whereas the shared ledger and the assets that might be managed using those shared ledgers are game-changing innovations but essentially evolutionary. The idea of such assets, which I will label digital bearer instruments, goes back to the long-ago days of DigiCash and Mondex, but the idea of implementing them using technology that is (in principle) available to every single person on the planet is wholly new. 

This combination of the revolutionary but unproven and the evolutionary but nevertheless game changing fascinates me and I’ve been exploring it in a number of different areas. One such area is money, of course, and more particularly the notion of central bank digital currency. I feel this is often discussed in a confusing way (not by me). I see articles on the topic that almost randomly switch between “digital currency”, “cryptocurrency” and “digital fiat” to the point that they are essentially meaningless. So I thought it might be useful to build on my work and Kevin’s perspectives to create a worthwhile framework for exploring the topic.

Let’s begin by exploring what the central concept is all about. Ben Dyson and Jack Meaning from the Bank of England discuss a particular kind of central bank digital currency (what some would call  “digital fiat”) with quite specific characteristics.

  1. Universally accessible (anyone can hold it);

  2. Interest-bearing (with a variable rate of interest);

  3. Exchangeable for banknotes and central bank reserves at par (i.e. one-for-one);

  4. Based on accounts linked to real-world identities (not anonymous tokens);

  5. Withdrawable from your bank accounts (in the same way that you can withdraw banknotes).

This seems to me to be quite sensible definition to work with. So, digital fiat is a particular kind of digital money with these specific characteristics. We can now start to fill in the blanks about how such a system might work. For example, should it be centralised, distributed or decentralised? Given that, as The Economist noted in an article about given access to central bank money to everybody, “administrative costs should be low, given the no-frills nature of the accounts”, and given that a centralised system has the lowest cost, that would seem to point toward something like M-PESA but run by the government.

There are, however, other arguments in favour of using newer and more radical technological solutions., not least of which is our old friend privacy. Again, as The Economist notes, people might well be “uncomfortable with accounts that give governments detailed information about transactions, particularly if they hasten the decline of good old anonymous cash”. However, as I have often written, I think there are ways to deliver appropriate levels of privacy into this kind of transactional system and the pseudonymity is an obvious way to do this efficiently within a democratic framework.

Aside from privacy, there’s another argument for moving to new technology rather than a centralised database, and it has come to the fore in the light of the recent Visa Europe systems collapse, which is what to do to make such a digital money system, 99.999% available. Here is where new technologies might be able to deliver the step change that takes us into the realm of practical digital fiat. Such a payment system would be an element of critical national infrastructure, which is why it might be worth looking at some form of shared ledger technology, possibly even a blockchain of some kind, in this context.

Here’s my take on the situation, then, with a diagram that I’ll be showing at Future Tense in Zagreb on 2nd October. It is congruent with Kevin’s taxonomy but adds the “digital identity” layer to show that the token trading might be pseudonymous in most practical circumstances within specified limits. 

Digital and Crypto Layers


In this formulation, we have a digital value layer that may or may not be implemented using a blockchain to create the bearer instruments, then a cryptoasset layer built on top of that (let’s put one side what the different kinds of cryptoassets might be as for this discussion I’m only interested in digital money) and then a digital identity layer on top. My assumption is that cryptoassets will be implemented using what some people call “smart contracts” (I prefer the term “consensus applications”) and the general term for these vehicle used to move these assets is the “token”. So I hope you can now see how the world of Bitcoins and tokens and Initial Coin Offerings (ICOs) and blockchains and digital identity all come together here.

So. If this is sensible way to implement money, as the Winklevii and others seems to think, who will manage the assets that are linked to these tokens? The first and most obvious possibility is commercial banks, as in the case of Gemini Coin. But there are others, as I set out in my most recent paper, and I’ll be exploring all of them in Zagreb. See you there.

Starbucks Stablecoins

I ignore almost all of the meaningless shilling masquerading as “news” that arrives via my cryptocurrency feeds, but a recent story about Bitcoin in the mass market caught my attention because it appeared to herald an unexpected and significant shift in the mass-market use of the digital gold. The announcement was that Starbucks is “working with Microsoft and a leading global exchange on a new digital platform that will allow consumers to use bitcoin and other cryptocurrencies at Starbucks”. Wow. That’s a pretty big deal. LiteCoin for latte would indeed be hugely significant. But…

That headline about Starbucks taking Bitcoin struck me as a little odd, since I distinctly remember that Howard Schultz, the executive chairman of Starbucks, said back in January that “I don’t believe that bitcoin is going to be a currency today or in the future”. Indeed when I looked at the actual story I realised that it was, as you probably suspected, not true. And, what’s more, just a couple of days later I read that “Starbucks has clarified that it will not be accepting Bitcoin (BTC) or other cryptocurrencies as payment”. As I suspected.

Reading further into the announcements we get down to the the brass tacks. Starbucks has no intention of accepting Bitcoin at retail point of sales (and nor, I imagine, does any other Main Street retailer). Starbucks said that they will play a “pivotal role” is developing applications “for consumers to convert their digital assets into US dollars”. Note the specifics: to convert cryptocurrencies into US dollars. What was actually being announced was, essentially, a plan to find a way of loading Starbucks wallets from Bitcoin accounts.

In other words, the conversion from Bitcoin into Starbucks private currency. Bitcoin to Starbucks Stablecoin, if you like, since Starbucks guarantees to redeem their private dollars at par with US dollars, so long as your redeeming them in order to buy coffee or a variety of other soft drinks, bottled waters and snacks.

Now, earlier in the year Jeremy Light, who knows what he is talking about, made the evolution of retailer wallets central to his predictions for change in the payment sector this year. He said that these wallets – for both online and in-store purchases, where I expect to see convergence – will spread “emulating the success of Starbucks and Walmart” by focusing on slick checkout. I think Jeremy is right about this and that’s what makes the Starbuck announcement mildly interesting, because a convenient mechanism to load retailer wallets from cryptocurrency accounts would actually make the use of them more attractive.

There is no point try to extend Bitcoin acceptance at point-of-sale. That’s not what is was designed for and it makes no sense from a strategic perspective for retailers to mess around with in-store systems, service and acceptance to accommodate Bitcoin, Ethereum, DogeCoin or anything else. However, having online mechanisms to load the retailer wallets is a different proposition, because the point-of-sale systems only need to be modified once (to accept the wallet) and the any number of back-end conversions can be explored without requiring further front-end modifications. That’s a win-win for the retailers and for the cryptocurrency users.

Twenty Years Ago!

………..the second Consult Hyperion seminar on……….

………….. D I G I T A L … M O N E Y …………….

The Tower Thistle Hotel London March 8-9th 1999

………………Confirmed Programme…………………

Day One: Economic & Business Issues

Chair Duncan Goldie-Scot Editor, Financial Times Virtual Finance Report

Keynote Address: European Multiple Currencies Sir Richard Body, M.P.

Digital Money is a Social Issue David Birch, Director, Consult Hyperion.

The European Digital Money Picture Dag Fjortoft, Deputy General Manager, Europay International.

Telecommunication Service Providers as Payment Operators Norman Bishop, Product Manager for Micropayments and E-Cash, BT.

Retailing and Digital Currencies Paul Arnold, Head of Tesco Direct.

The European Mass Market: Digital TV’s Requirements for Digital Money Richard Cass, Transactional Commerce Manager, British Interactive Broadcasting

Digital Money and Digital Phones: Europe’s Advantage Tim Baker, Wireless Marketing Comms. Manager, Gemplus

Transforming Businesses with Digital Money John Noakes, Business Manager for E-Commerce & Supply Chain, Microsoft UK.

Day Two: Regulatory & Technical Issues

Chair Ian Christie Deputy Director, DEMOS

A Legal Pespective on Digital Money in Europe Conor Ward, Partner in Computers, Communications & Media, Lovell White Durrant.

A View from the European Commission Philippe Lefebrve, Head of Sector in Financial Systems, European Commission DGIII.

The Technologies of Digital Money Marcus Hooper, Principal Payments Technologist, IBM United Kingdom.

Visa and Digital Money Jon Prideaux, Executive VP New Products (EU Region), Visa International.

Making Digital Money Work. Tim Jones, Managing Director of Retail Banking, National Westminster Bank plc.

Experiences from an Operational Micropayment Scheme Nigel Moloney, Senior Manager in Emerging Markets Group, Barclays Bank.

Mondex: A Status Report Victoria Mejevitch, Mondex Product Manager, Mondex International.

The Common Electronic Purse Specification (CEPS) Daniel Skala, Executive VP for Sales, Proton World International.

Bitcoin is going off the rails, but so what?

Number goes up, number goes down. Cryptocurrencies as a whole have been tumbling, and the original cryptocurrency, Bitcoin, is no different. It looks as if there was a bubble and it is bursting. The economist John Kay is unconvinced that this bubble will lead to anything. He wrote that “the underlying narrative of cryptocurrencies is, by the standards of historic bubbles, unusually weak; more akin to tulips than to ultimately transformational innovations such as railways or electricity” going on to observe that the “power of the current narrative is that it brings together so many features which make for an attractive and infectious story” which I think is congruent with some observers’ view of Bitcoin as a protest movement rather than a financial revolution.

I have a suspicion that John may be wrong though. I think Bitcoin will have an impact and that it will lead to the creation of new markets. His mention of the railways reminded me of Nouriel Roubini and Preston Byrne’s observation that that the cryptocurrency mania of today “is not unlike the railway mania at the dawn of the industrial revolution in the mid-19th century”. I’d put the dawn of the industrial revolution a little earlier than that, but The Black Swan and The Black Marmot are on to something here and to see why you need to know a little about that railway mania that they refer to.

Opening Liverpool and Manchester Railway.jpg
By A.B. Clayton, Public Domain.

I wrote about it some years ago for Financial World magazine (back December 2011 in fact) and made the point that Victorian Britain’s railway boom was truly colossal. The first railway service in the world started running between Liverpool and Manchester in 1830 and less than two decades later (by 1849), the London & North Western railway had become the Apple of its day, the biggest company in the world.

(See Christian Wolmar’s fabulous Fire and Steam for a beautifully written history of the railways.)

This boom led to a colossal crash in 1866. The crash was caused (here’s a surprise) by the banking sector, but in that case it was because they had been lending money to railways companies who couldn’t pay it back rather than American homeowners who couldn’t pay it back. Still, then as in our very own crash of 2007, the government had to respond. It did so by suspending the Bank Act of 1844 to allow banks to pay out in paper money rather than gold, which kept them going, but they were not too big to fail and the famous Overend & Gurney bank went under. When it suspended payments after a run on 10th May 1866 (as frequently noted, the last run on a British bank until the Northern Rock debacle), it not only ruined its own shareholders but caused the collapse of about 200 other companies (including other banks).

(The directors of Overend and Gurney were, incidentally, charged with fraud but got off as the judge said that they were merely idiots, not criminals.)

The railway companies were enormous and many ordinary people had invested in them. When their Directors went to see the Prime Minister in 1867 to ask for the nationalisation of the railway companies to stop them from collapsing (with dread consequences for the whole of the British economy and in particular the widows and orphans who had invested in them) because they couldn’t pay back their loans or attract new capital, they didn’t get the Gordon Brown surrounded by advisers who happened to be bankers tea and sympathy followed by the suspension of competition law. Benjamin Disraeli told them to get stuffed: he didn’t see why the public should bail out badly run businesses, no matter how big they might be.

The Mallard, holder of the world speed record for steam locomotives, 126mph.

Needless to say, the economy didn’t collapse. As you may have noticed, we still have trains and tracks. A new railway industry was born from the ruins, just as new cryptomarkets will arise from the ruins of Bitcoin. The transport services kept running because the new industrial economy needed them and that economy kept on growing. The new post-industrial economy needs a new transport network, for bits rather than iron and coal, and Bitcoin’s heirs and descendants might well provide it. The impact of the railway crash was not restricted to rail transport and the industries that used it, just as the impact of the Bitcoin crash will spread far beyond online drug dealing and mad speculation.

As I noted in my book “Before Babylon, Beyond Bitcoin”, Andrew Odlyzko’s superb paper “The collapse of railway mania, the development of capital markets, and Robert Lucas Nash, a forgotten pioneer of financial analysis” argues convincingly that the introduction of basic corporate accounting standards following the collapse of the railway companies was a significant benefit to Britain and aided the development of Victorian capitalism. You can’t make an omlette, as the saying goes, without letting the bad eggs go to the wall. Hence, as I summarised more recently, the vital lesson of that crash is that letting the railways collapse not only led to a stronger railway industry but it also helped other industries as well, because it meant that new standards for accounting and reporting were put into place.

This is hardly a novel observation. History has repeatedly gone through this cyclic co-evolution of technology, business and regulation to end with something pervasive and fundamental to the way that society operates, which is why I think Nouriel and Preston are right to use the comparison. Benoît Cœuré, chair of the Committee on Payments and Market Infrastructures (BIS), and Jacqueline Loh, chair of the Markets Committee (BIS) made a very good point about this in the FT writing that “while bitcoin and its cousins are something of a mirage, they might be an early sign of change, just as Palm Pilots paved the way for today’s smartphones”.

This, I think, is the narrative that I find most plausible. But what are cryptocurrencies “paving the way” for? I think it is for cyryptomarkets that trade in cryptoassets: cryptocurrencies with an institutional link to real-world assets. These are markets made up from money-like digital bearer instruments or, for want of a better word, “tokens”. As I have written before, it is not the underlying cryptocurrencies that will be the money of the future but the “tokens” that they support. Assuming that the fallout from the Bitcoin bubble is better regulation of the platforms, then cryptomarkets based on tokens will aid the evolution of post-modern capitalism as much as the invention of auditing helped Victorian entrepreneurs a century and half ago.

The Man Who Tokenised The World

David Bowie was a genius. That is a word that gets bandied around all too lightly these days, but in his case it is entirely justified. And not because of his music, as brilliant as it is. No. Bowie was a genius because he understood the future. When looking at how the internet was developing, he famously predicted the end game: streaming. Indeed, he said at the time that music would become “like water” piped into our homes.

(And his music was indeed brilliant: Aladdin Sane was the first album I ever bought with my own hard-earned cash, Ziggy Stardust was part of the soundtrack to my college years and “Heroes” is one of my all time favourite songs.)

Not only did Bowie predict the future, he monetised it. In what I am convinced that future economic historians will surely highlight as one of the weak signals for change to a post-industrial economy, he created the Bowie Bond. This was a 10 year, 7.9% self-liquidating bond backed by the revenues from all of his music prior to 1993. The value of this over a decade was estimated at $100 million and stamped as AAA by credit rating agencies. Then, in 1997, these bonds were sold to Wall Street. Whether Bowie knew that this valuation was nonsense or not I couldn’t say, but he made $55 million from the bond sale. A few years later, the bonds were trading as junk. Bowie, as it turned out, was smarter than the bond market.

Ten years ago I wrote about the Bowie Bonds when I was thinking a lot about private currencies and digital money. It had occurred to me that those $1,000 Bowie Bonds were a shade away from being a form of Bowie Bucks and that if they had been issued as some kind of digital bearer instrument (DBI, or what many people now call “tokens”) then would have been a form of repetitional currency. I said that while it might seem strange to imagine trading in Bowie Dollars that are simply units of Bowie bonds, why not? As I noted at the time, it would be no different to trading with Edward de Bono’s “IBM Dollar” (in that it’s a claim on some future asset) or a similar instruments.

At the time, of course, I did not know that the shared ledger revolution was around the corner, so I imagined that Bowie Bucks would be implemented either in decentralised hardware (a la Mondex) or centralised software (a la Digicash). Now we have another and more appealing alternative to deliver the currencies of the future: tokens trading on shared ledgers. If Bowie were here today, I’m sure he would be discussing a token sale rather than a bond sale. But on what platform? Do the permissionless public ledgers work as a platform? Or do we need institutions to create permissioned ledgers with service-level agreements? How exactly will the money of the future work?

Digital and Crypto Layers 

I’ll be talking about this world of cryptomarkets, cryptoassets and cryptocurrencies at the 3rd Nordic Blockchain Summit at Copenhagen Business School on Friday, so I look forward to seeing you all there. I’m genuinely keen to learn more in this space interested your spectrum of view on tokenisation and such like. Don’t be shy with the question.

Oh no, not “legal tender” again

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. 

Secondly, the argument was stupid because the person I was arguing with hadn’t bothered to fact-check the story that they were arguing with me about in the first place. It was to do with this story, supposedly noting Bitcoin’s status in Japan saying that “in Japan bitcoin core (BTC) is ruled legal tender and is already used to buy everything from airline tickets to sushi”. This is, as you may suspect, is completely false because in Japan the Virtual Currency Act defines Bitcoin (and other virtual currencies) as a form of payment method and not as any kind of legally-recognized currency or legal tender.

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.

Basically, nothing is happening in UK banking

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.

Signatures, Sergio and standardising the payment experience

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.”

From “Traditional signatures are dying out amid digital revolution”.

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.

Money 2020 Signature

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 “eccentric relics”, 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.