Margaret Attwood, Kenneth Rogoff and William Gibson (and me)

A few years ago I was involved in a series of Twitter exchanges about the relationship between cash and anonymity that stimulated me to write a blog post on that topic and that debate (see “It doesn’t have to be the handmaid’s tale” from September 2016). Some more recent exchanges on the same topic made me think about revisiting and revising that post and exploring some of the ideas in further in light of recent discussions (eg, Libra and central bank digital currencies).

The root of these debates is, of course, that many in the Bitcoin community see Bitcoin’s sort-of-anonymity as an important characteristic because it defends the individual against state power and they berate me for wanting to replace cash “in circulation” with a digital alternative. Cash, they claim, is freedom, and they are correct about this: as cash is uncensorable, you have the freedom to buy what ever you want with it.

So should we replace cash with an anonymous cryptocurrency or digital currency? There are many people who I greatly respect who think the former. For example, in his presentation on ’The Zero Lower Bound and Anonymity”, Kocherlakota tends toward some form of cryptocurrency to replace fiat currency rather than a central bank digital currency and one of the reasons for this is his (entirely reasonable) concern about anonymity. This point is illustrated by a literary reference to Margaret Attwood’s “Handmaid’s Tale”, in which a theocratic American government (the “Republic of Gilead”) has taken away many of the rights that women currently enjoy. One of the tools that this government uses to control women is a ban on cash. In Gilead, all transactions now routed digitally through the “Compubank”.

The Handmaid's Tale

It was many, many years since I’d read “The Handmaid’s Tale” so I went to my bookshelf to dig it out and re-read that part. The narrator does indeed talk about how the evil junta in charge of that future America took over and says that it would have been harder if there had still been paper money. But the truth is, I don’t see how. North Korea has everyone using paper money and virtually no cards. Denmark has virtually no paper money and everyone uses cards (and phones). To be frank, in the modern world, I don’t think cash is that closely related to dictatorship.

The point I wanted to make here, though, is that it is wrong to present the only two alternatives as total surveillance and anonymity. I simply do not accept that the alternative to the unconditional anonymity of cash and the crime that goes with it is a dystopian, totalitarian nightmare. That’s only one way to design a circulating medium of exchange and it’s not the way that I would design it. I would opt for something along the lines of a universal pseudonymous mechanism capable of supporting an arbitrary number of currencies, a Mondex de nos jours, an M-PESA with go-faster stripes. In a world where there are completely, unconditionally anonymous payment mechanisms in widespread use there’s no way to stop very bad people from using them to do very bad things, so I’d prefer a world in which there are pseudonymous mechanisms that defend against routine surveillance and petty intrusion but allow societies legitimate interests to protect against crime.

Does this mean that anonymous mechanisms should be banned? Probably not, for the good reason that it would be impossible to do so. More likely would be a situation shown in the diagram below where there is an anonymous layer that has a pseudonymous layer on top of it and a absonymous (I made this word up) on top of that. People, governments and businesses would use the pseudonymous layer for the majority of transactions: the anonymous money would be useless for almost all transactions for almost all people since no-one would accept it. I would love to give this kind of anonymous money the generic name zerocash, after the William Gibson novel (“Count Zero”) in which one of my all-time favourite quotes about the future of money appears, a quote that more accurately describes the foreseeable future of payments than anything from IBM or the IMF:

He had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff, it was just that nobody ever did anything legitimate with it.

(Unfortunately, someone else had already beaten me to the name! See E. Ben-Sasson, A. Chiesa, C. Garman, M. Green,I. Miers, E. Tromer, and M. Virza, “Zerocash: Decentralized anonymous payments from bitcoin” in IEEE Symposium on Security and Privacy, SP 2014, Berkeley, CA, USA, May 18-21, 2014. IEEE Computer Society, pp.459–474 (2014). But I’ll stick to using the all lower-case zerocash to mean generic unconditionally anonymous electronic cash. The wallet that this electronic cash is stored in is an anonymous digital identity. It’s just a string of bits.)

Now, you could imagine some form of zerocash in circulation as a cash alternative but not accepted in polite society (i.e., any attempt to spend it would be regarded as prima facie evidence of money laundering and exchanges would be barred from handling it). Polite society instead decides to protect privacy through managed conditional anonymity, or pseudonymity. A pseudonymous currency that is managed by a central bank but where transactions take place on a distributed ledger is much more like “RSCoin”, the cryptocurrency that was proposed by George Danezis and Sarah Meiklejohn at UCL [Danzis, G. and S. Meiklejohn. “Centrally Banked Cryptocurrencies”, NDSS ’16, 21-24 February 2016, San Diego, CA, USA] using Ben Laurie’s “mintettes” concept. By creating a pseudonym that is bound to the zerocash digital identity, we make it useful (provided that the binding is done by someone who trusted in the relevant transactional use cases).

Why bind it in this way? Well, there is the usual privacy paradox to be dealt with here: I want my transactions to be anonymous, but everyone else’s to be not anonymous in case they turn out to be criminals. I cannot see any way round this other than pseudonymity. There are people out there (e.g., my colleagues at Consult Hyperion) that know how to design systems that work like this, so there’s nothing stop the FATF, Bank of England, or Barclays or anyone else from starting to design the future, privacy-enhancing electronic money system that we need.

In the real world, as the discussions around Facebook’s proposed “Libra” digital currency have shown, regulators will never allow zerocash. In fact, in the light of the recent FATF rules about identification for cryptocurrency transfers, they will not allow any form of transaction that does not provide full details of counterparties. They might, however, as I have suggested many times before, be prepared to allow some form of pseudonymous alternative provided that we can bind the pseudonym to real-world legal entity through trusted institutions.

Bank are of course a good place to form and maintain this binding, since they’ve already done the KYC and know who I am. So I give present my pseudonym to them and they can bind it to my “real” name to form a nym. In the example below, Barclays know who I really am, and I can present my Barclays nym where needed, but most transactions with counterparties take place at the pseudonymous layer and I can present my Vodafone pseudonym “Neuromancer” there if I want to. My counterparty doesn’t know that I am Dave Birch, only that Vodafone know who (and presumably, where) I am. For the overwhelming majority of day-to-day transactions, this is more than adequate. This layered approach (show below) seems to me a viable vision of a working infrastructure. Few transactions in the top layer (for privacy), most transactions in the middle layer, few transactions at the lower layer.

Layered model of cryptomarkets

So in this made-up example, Barclays know my “real” identity and Vodafone knows a persistent pseudonym tied to my phone number. (Of course, I could go to Barclays and choose to bind my Vodafone identity to my Barclays identity, but we don’t need to think about this sort of thing here.) I’m going to reflect on how these bindings might work in practice more in the future, but for now I want to circle back to that opening concern about losing the anonymity of cash. Here’s another version of that meme that I read in Reason magazine (“Cash means freedom”) a while back: “Cash—the familiar, anonymous paper money and metallic coins that most of us grew up using—isn’t just convenient, it’s also a powerful shield for our autonomy and our privacy”

But it really isn’t. Your privacy is being taken away because of social media, people wearing cam-shades and ubiquitous drones, not because of debit cards. And none of this has anything to do with dictatorship. I wouldn’t want to live in the America of the “The Handmaid’s Tale” whether it had anonymous payments or not. I understand the concerns of those concerned with privacy (as I am) that there might be an inevitable tendency for a government to want to trespass on the pseudonymous infrastructure in the name of money laundering or terrorism, but that’s a problem that needs to be dealt with by society, not by technology.

Look, I think we should start to consigning cash to the dustbin of history, beginning with the $100 bill, the £50 note and that affront to law-abiding people everywhere, the Swiss 1,000 franc note. There are an increasing number of people coming around to my way of thinking, including the former chief economist to the International Monetary Fund (IMF) Kenneth Rogoff, who in his book “The Curse of Cash” argued that large value banknotes should be withdrawn not only because of their use in criminal endeavours but because they prevent central banks from using their full range of monetary policy tools. If we are going to start getting rid of cash though, we need to come up with alternatives the provide levels of privacy and security determined by society as a whole, not by a few engineers.

We need to go cashless, not drift into cashlessness

Having just been to China for Money2020 and having experienced at first hand the operation of a cashless society, I’ve even thinking (again) about the design of cash-replacement payment systems for a range of perspectives, using China as a case study. The first point to make is that people in China are well aware of what happens to when society switches from anonymous cash to not-anonymous (I can’t think of a suitable antonym) electronic payments. As observed in the Financial Times, “that scale of data accumulation is beyond our imagination”. The Chinese woman making this comment (while observing that despite her concerns about privacy, mobile payments are too convenient to opt out of) goes on to say (somewhat poetically, in my opinion) that she cannot tell whether her compatriots are “constructing a futurist society or a cage for ourselves”

Not everyone in China is part of this revolution, of course. The World Bank Global Findex database, which measures financial inclusion, estimates that as of lat year some some 200 million Chinese rural citizens remain unbanked, or outside of the formal financial system. As in Sweden, the shift toward cashless is raising issues around exclusion and marginalisation.

There are, for example, supermarkets with different lanes for cash or cashless payments that act as physical manifestation of social stratification between, as Foreign Policy notes, the young and the old and between the urban middle class and those left behind (between, as David Goodhart would put it, the “anywhere” and the “somewheres”). I’ve written before that we will see the same in the UK as cash vanishes from middle class life to become the preserve of the rich and the poor who will use it for tax evasion and budgeting respectively. A “Which” survey found that over 75% of low-income households rely on cash, as well as over 80% of elderly households. The shift to cashless society must be planned to help these groups so that they share in the benefits of cashlessness.

Woking going cashless

Cash is vanishing even in Woking.

I think we should start to plan for this now. In China, as in Sweden (where the New York Times observes that “cash is disappearing in the country faster than anyone thought it would“), we are beginning to see what happens to societies that slide into cashlessness. I am against this. That is, I am in favour of cashlessness, but I am in favour of it as a policy decision by society that is implemented to meet society’s goals. I couldn’t disagree more with the Wall Street Journal’s view that the move to cashless society “should be left to technological advancement”. No, it should not. This is a matter of great importance and with significant implications for society. The strategy should therefore be set by society, not by technologists.

Now, clearly, technological advances deliver new possibilities to policymakers and it is good for technologists to explore these possibilities. But, as they say, just because something can be done does not mean it should be done. We need a proper debate and a regulatory envelope set out to move forward. I wonder if we might seize the opportunity and set down a technological marker for post-Brexit Britain by declaring that cash will be irrelevant in the UK in a a decade. That is, anyone who needs to pay for anything will be able to do so electronically and that anyone who does not want to pay electronically will be presented with a method for paying in cash, albeit one that they have to pay for like (like cheques).

This must mean that in parallel we must set a national goal to provide a free at the point of use electronic payments infrastructure for everyone. Otherwise we’ll end up where they are in America, where jurisdictions are trying to ban cashlessness (and thus keep the cost of the payment system high, especially for the poor) in the name of social justice. In New York, Congressman Ritchie Torres has put forward proposals to force businesses to accept cash and called them a a “new frontier” of anti-discrimination law that is needed to prevent a “gentrification of the marketplace”. Similarly, as the Washington Post reports, lawmakers in the nation’s capital have introduced a similar bill. A council member there said that by refusing cash businesses are “effectively telling lower-income and younger patrons that they are not welcome”. Maybe, but if so it’s only because those demographics don’t spend enough to provide the margin needed to cover the cost of cash.

It’s time to start thinking about what the requirements for that infrastructure are and consulting consumer organisations, businesses and government departments on their needs. We need to make a cashless Britain, not simply allow a cashless Britain.

Something funny is going on with our great British cash

In our United Kingdom, the value of currency in circulation has dropped, year on year, for seven consecutive months (see chart), for the first time since records began in the 1960s. This is something of a surprise. For many, many years the use of cash for purposes such as shopping has been steadily decreasing while the amount of cash “in circulation” has been steadily increasing. Broadly speaking, the use of cash for legitimate activities has been falling while the use of cash for drug dealing, money laundering, tax evasion, payments to corrupt officials and so on has been rising. Hence my surprise at this shift in the statistics.

Of that cash that is “in circulation”, the £16.5 billion in £50 notes is particularly puzzling. Earlier this year the Treasury said that £50 notes were “rarely used” for routine transactions and that “there is also a perception among some that £50 notes are used for money laundering, hidden economy activity, and tax evasion”. I’ll say. This perception is widespread, by the way. A couple of years ago Peter Sands, the former head of Standard Chartered, said that the main use of the £50 was illicit and he’s a banker not a mere blogger such as myself.

Given this perception, I would have thought that is was time for the Treasury to tell the Bank of England to stop making life easy for criminals and withdraw the £50 over a two year period. But apparently not. Given that no-one is using them for legitimate purposes, the Bank of England has decided that now is a good time to bring the £50 up to date and make it out of plastic. Robert Jenrick, exchequer secretary to the Treasury, explained the decision by saying that “people should have as much choice as possible when it comes to their money and we’re making sure that cash is here to stay” although I don’t think anyone in the Treasury or anywhere else was asking for cash to be removed from circulation, only for a narrowing of the spectrum (dumping 1p and 2p coins, two-thirds of which are only used once, and removing £50 notes leaving the £20 as the highest denomination).

Oh well. I suppose tax evaders are more of an electoral force than I thought. According to the HMRC’s latest estimates that are shown the chart below (for 2016/2017), almost half of the tax gap is down to small businesses and they account for nearly three times as much of the missing tax as “criminals”. I’m not sure if these groups are natural Conservative voters, but they must in some measure account for the governments reluctance to inconvenience those responsible for the lion’s share of missing taxes.

UK Tax Gap Customers 2017 Picture

 

As an aside, the Bank says that it wants a scientist to be the face of the new notes and (god help us) says it will ask the public who it should be. But why a scientist? That doesn’t seem appropriate to me. Surely a much better choice would be the late and much lamented national treasure Sir Kenneth Dodd of Knotty Ash who, rather famously, kept enormous piles of cash in his attic because he didn’t trust banks. Or perhaps one of our greatest jockeys, Lester Piggott, who was once sent down for three years for tax evasion. I think the Bank should be told: the medium is the message.

Why do I keep going on about this? It’s because the people who benefit from the convenience of £50 notes (eg, builders avoiding VAT) are doing so at the expense of law-abiding tax-paying citizens (eg, me) and I have to fill in my tax form soon.

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.

Transactions, hoards, stashes and exports

In 2016, cash was used for 44% of all consumer transactions in the UK. That was down from 50% the previous year and from 68% a decade earlier. Victoria Cleland, Chief Cashier at the Bank of England says that the value of notes “in circulation” has been increasing year on year for the past decade or so and that “we are still seeing growth in total demand for cash”. This seems puzzling, considering that this year the UK will see 13.4 billion debit card payments (of which a third will be contactless) but only 13.3 billion cash payments (according to PaymentsUK).

 Studio 34

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

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

That’s right. Banknotes, statistically, not being used to buy things. Cash is no longer primarily a means of exchange. The latest figures from the Bundesbank show that nine out of every ten euro banknotes issued in Germany are never used in payments but hoarded at home and abroad as a store of value. Not “rarely”. Not “infrequently”. Never. The notes are not in circulation at all but are stuffed under mattresses.

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

Aha. The shadow economy.

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

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

  2. Hoards. These are stores of money legally acquired but held outside of the banking system, like the 300 grand that Ken Dodd used to keep in his loft. If the amount of cash that is being hoarded has been growing then that would tend to indicate that people have lost confidence in formal financial services or are happy to have loss, theft and inflation eat away their store of value while forgoing the safety and security of bank deposits irrespective of the value of the interest paid.

  3. Stashes. These are stores of money illegally acquired or held outside the banking system to facilitate criminal behaviour. My personal feeling is that stashes have grown at the expense of hoards.

    In a fascinating paper by Prof. Charles Goodhart (London School of Economics) and Jonathan Ashworth (UK economist at Morgan Stanley), they note that the ratio of currency to GDP in the UK has been rising and argue that the rapid growth in the shadow economy has been a key cause. If you look at the detailed figures, you can see that there was a jump in cash held outside of banks around about the time of the crash, but as public confidence in the banks was restored fairly quickly and the impact of low interest rates on hoarding behaviour seems pretty marginal, there must be some other explanation as to why the amount of cash out there kept rising.

    Two rather obvious factors seemed to support the shape of the curve are the increase in VAT to 20% and the continuing rise in self-employment (this came up a couple of times in comments to that Guardian piece by the way), both of which serve to reinforce the contribution of cash to the shadow economy.

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

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

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

Germany is an outlier

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

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

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

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

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

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

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

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