Scrip and truck

The Consensus Distributed virtual conference had some pretty interesting sessions this year. There was a lot of talk about disruption coming not just to the payments business but to money itself, and this time is wasn’t coming from the Bitcoin maximalists. Some of the fantastical futurists predicting a fundamental shift in the set of international monetary arrangements (eg, me) think that it isn’t simply about new technology enabling decentralised alternatives but about a confluence of economic and political factors that create an environment for new technologies to take root. Things really are about to change.

This may seem a radical prediction, but it really isn’t. People think about money as a law of nature, as a kind of constant, but the way that money works today is not only just one of many ways in which it could work, it’s a relatively recent set of arrangements in the great scheme of things. It wasn’t that long ago that the developed world was on a commodity standard (ie, gold) and there was no national fiat currency. Go back 150 years and America did not have a central bank and a century ago there wasn’t even a circulating medium of exchange.

Wait? No money? Yes. At the height of the
Great Depression, 1932 and 1933, when the interest rate on U.S. Treasury bills was negative, unemployment was 25 percent and bank runs and closings were common. With no money moving around the economy, Americans reverted to barter.

It’s hard to imagine this now, but at that time America literally ran out of money. Because there was no cash — no Federal Reserve notes — available, communities began to print their own money. This was known as “scrip” and it is by no means limited to this single historical case: it’s a common phenomenon. An often-used example (by me, for example, in my book “Identity is the New One“) comes from the more recent Irish bank strikes, when people in Ireland wrote personal cheques to each other and these were then passed on to form a community scrip as a cash substitute in local economies. British Postal Orders circulating on the Indian subcontinent performing a similar function.

The “depression scrip ” issued around America took many forms (there is a vibrant collectors’ market for this: just search on eBay) and was issued by communities, companies and individuals. And it became close to becoming the norm! As Bernard Lietaer points out in this 1990 article, Dean Acheson, then the Assistant Secretary of the Treasury, had been approached by Professor Irving Fisher with the idea of scrip with a high “negative interest” rate (2% per week) and was calculated so that the face value would be amortised over one year, and the currency withdrawn at that point. Acheson decided to have it checked by his economic advisor, Professor Russell Sprague at Harvard. The answer was that it would work, but that it had some implications for decentralised decision making which Acheson should verify in Washington.

(In “Monopoly: The World’s Most Famous Game and How It Got That Way”, author Philip Orbanes mentions in passing that in 1933, Parker Brothers used their printing presses to print scrip that was accepted in their home town of Salem, Mass. Games to the rescue! I wonder if next time the financial system fails, it will be World of Warcraft gold , not Monopoly money, or Monero, or cartons of Marlboro, that fill the breach as the means of exchange to keep the economy going.)

In many parts of America, scrip was already part of the local economy. My good friend Brett King reminded me just the other day that in the Appalachians, “coal scrip” issued by mining companies was common. The companies argued that the remoteness of mining operations made it complex and expensive to provide cash. (In addition, it has to be said, to managing their capital outflows.) Interestingly, while the mining companies themselves would not redeem the scrip for cash it naturally traded for cash at a discount within the nearby communities. Indeed, in 1925 coal company lobbyists managed to get West Virginia to pass a law prohibiting scrip from being transferred to third-parties (this would be much easier to enforce with Bitcoin today)) thus crystallising the companies power over their employees to a form of serfdom.

(There are some lovely pictures of depression era script over the Wall Street Journal.)

This was not an American phenomenon. During the industrial revolution, and driven initially by the lack of money in circulation, a variety of British companies created money to pay their worker. This was known as “truck”, which is why the measures passed by the British Parliament starting in 1831 regarding the money payment of wages were known as the “Truck Acts”. Under these provisions, employers were forced to pay workers in cash, laws that remained in place until 1960 where they were superseded to allow for payments by cheque.

Anyway, back to America in its cash-free depression. While Acheson’s discussions were going on, the “stamp scrip movement” as it became known, had created interest by no less than 450 cities around the United States. For example the City of St. Louis, Missouri, had decided to issue $100,000 worth of stamp money. Similarly, Oregon was planning to launch a $75 million stamp scrip issue. A federal law had been introduced in Congress by Congressman Pettengil, Indiana, to issue $ l billion of stamped currency. Fisher published a little handbook entitled “Stamp Scrip” for practical management of this currency by communities, and described the actual experience of 75 American communities with it.

It looked as if the U.S. might adopt a decentralised money system, but on 4th March 1933 FDR passed legislation to enforce bank holidays, end the convertability of gold and to force the population of to sell their gold to the Federal government. In addition to launching the New Deal, the administration prohibited the issue of “emergency currencies” and the experiment was over. But, I cannot help but wonder, is it over forever? Now that the technologies of blockchains, biometrics and bots mean that absolutely anyone can issue their own money, why not look at community scrip as way to reboot devastated economies?

I am hardly the only person to think this way. In virus-ravaged Italy, the town of Castellino del Biferno in southern Italy’s Molise region has started to issue its own money (the “Ducati”), redeemable in local merchants only, with a 100% reserve in euros. This kind of scrip (strictly speaking, a “currency board” rather than a “currency”) is intended to keep money circulating within the local economy but there’s no reason why an actual local currency might not circulate over a wider area. In the north of Italy, to continue with this particular example, anti-euro Lega nationalists and the alt-Left Five Star Movement were at one time planning to go around the euro and create a rival payment structure based on ‘IOU’ notes (a course of action I may well have helped to stimulate). If the COVID-19 crisis tips us into even more of depression, more regions may well decided to decouple themselves from national and supra-national currencies in order to manage their own monetary policy on the road to recovery.

(It’s surprising, I think, to Europeans to realise just how much passion these events still stir today: there are no end of books, magazines, pamphlets and web sites that still refer to FDR’s actions then as if they were yesterday.)

China moves forward with CBDC

The first reports have appeared concerning the Digital Currency/Electronic Payment (DC/EP) system being tested in four cities: Shenzen, Chengdu, Suzhou and Xiong’an (the recently-established “development hub” near Beijing and it is where the “non-core” functions of the Chinese state are going to be relocated to). DC/EP is the Chinese implementation of a Central Bank Digital Currency (CBDC) and in my opinion at least it is a really interesting – landmark, in fact – development in the history of money.

DCEP phone

with the kind permission of Matthew Graham @mattysino

The implementation follows the trajectory that I talk about in my book The Currency Cold War, with the digital currency being delivered to customers via commercial banks. The Deputy Governor of the People’s Bank of China, Fan Yifei, recently gave an interview to Central Banking magazine in which he expanded on the “two tier” approach to central bank digital currency (CBDC). His main points were that this approach, in which the central bank controls the digital currency but it is the commercial banks that distribute it, is that is allow “more effective exploitation of existing business resources, human resources and technologies” and that “a two-tier model could also boost the public’s acceptance of a CBDC”. 

He went on to say that the circulation of the digital Yuan should be “based on ‘loosely coupled account links’ so that transactional reliance on accounts could be significantly reduced”. What he means by this is that the currency can be transferred wallet-to-wallet without going through bank accounts. Why? Well, so that the electronic cash “could attain a similar function of currency to cash… The public could use it directly for various purchases, and it would prove conducive to the yuan’s circulation”.

Hence what I thought most noticeable about the first implementations (this is from the Agricultural Bank of China, ABC) is that they do indeed in include this person-to-person offline transfer functionality. You can see the “touch it” button on the screen below.

(As I note in the book, this makes DC/EP look more like Mondex than Libra, so I was surprised to see the digital Yuan labelled “crypto-inspired” on Twitter!)

DCEP interface

with the kind permission of Matthew Graham @mattysino

Anyway, my main point is that I agree with what is said here in this Fortune magazine article ”China is poised to beat the U.S. in the digital currency race” which that the shift to what I call “smart money” will reward first-mover economies. As this article notes, China will quickly integrate its digital currency into hundreds of “blockchain” projects in which autonomous digital sensors and devices directly exchange information and money. Removing intermediaries from these device-to-device transactions will allow China to automate entire Internet of Things (IoT) ecosystems, bringing efficiency gains to smart cities, supply chains, and electricity grids.

(This is, incidentally, why things will need digital identities just as people do.)

More importantly on the global stage, the Forbes article notes that China could offer digital currency machine-to-machine payments all the way along its the Belt and Road Initiative (BRI). Indeed it could. And will. The noted venture capitalist Fred Wilson supports this view, writing that the shift to digital currencies will be led by China “who moves first and benefits the most from this move”. He goes on to say that America will “hamstrung by regulatory restraints and will be slow to move” resulting ultimately in decentralised finance exchanges in Asia becoming the dominant capital markets. Whichever way you look at, digital currency is a big deal.

The dollar, de Bono and digital currency

Many people think we are now coming to the end of what economists call the “Bretton Woods II” era of international monetary arrangements and, as The Economist observed recently, it is not at all clear what the next era will look like. The way that money works now is, essentially, a blip. It is a temporary institutional arrangement and it must necessarily change as technology, businesses and societies change. I am fascinated by the possibilities surrounding the digital currencies of the future and eager to learn more about the scenarios, so I was delighted to be asked by the Centre for the Study of Financial Innovation (CSFI) to write a report on digital currency for them in my capacity as their Technology Fellow. The result was “The Digital Currency Revolution”, launched this week. I took part in a video discussion about the report with Andrew Hilton, Director of this CSFI, and if you are at all interested in the topic I invite you to get a cup of tea, put your feet up and enjoy the video of the discussion.

CSFI TV

Part of the reason for my delight and excitement at the CSFI’s invitation is that many years ago I picked up a report from the called “The IBM Dollar”, written by the inventor of “lateral thinking”, Edward de Bono. This had a tremendous impact on me, coming as I was from the technology side of electronic money. IBM, in de Bono’s early 1990s thought experiment, might issue “IBM Dollars” that would be redeemable for IBM products and services, but are also tradable for other companies’ monies or for other assets in a liquid market. When I read this, I felt as if scales were falling from my eyes. It hasn’t occurred to me that anyone other than a central bank could issue money!

When I read de Bono’s ideas of tens of millions such currencies in circulation, constantly being traded on futures, options and foreign exchange markets, it might sound as if the “money” would be unusable because transactions would be unbearably complex for people to deal with. But as I wrote in “The Financial Times” some years ago, that’s not the world that we will be living in. This is not about transactions between people but transactions between what Jaron Lanier called “economic avatars“. This is a world of transactions between my virtual me and your virtual me, the virtual Waitrose and the virtual HMRC. This is my machine-learning AI supercomputer robo-advisor, or more likely my mobile phone front end to such, communicating with your machine-learning AI supercomputer robo-advisor.

These robo-advisors will be entirely capable of negotiating between themselves to work out the deal. Dr. de Bono foresaw this in his pamphlet, writing that pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction… the same system could match demands and supplies of financial assets, determine prices and make settlements. He also wrote that the key to any such a system would be “the ability of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties”, an early vision of what we might now call the reputation economy that I explored in one my previous books “Identity is the New Money”.

Now, two decades on from this description, we have a technology to implement and while the idea using cryptocurrencies as tokens linked to something in the real world  is hardly new (from the earliest days of Bitcoin people were using “coloured coins” to do this), token technology that creates “money like” digital assets does indeed change the calculus. When the current craziness is past and tokens become a regulated but wholly new kind of digital asset, a cross between corporate paper and a loyalty scheme, they will present an opportunity to remake markets in a new and better way.

It is reasonable to ask what will replace the IMF, central banks and commercial banks offering credit when it comes to creating money, facilitating payments and prosperity? This speculation is at the heart of my forthcoming book “The Currency Cold War”. The reaction of regulators around the world to one prominent potential competitor, Facebook’s proposed “Libra” digital currency, seems to indicate that the incumbents are not going to give up without a fight and the topic of central bank digital currency (CBDC) has arrived on the front pages. And, I will suggest, CBDCs themselves will soon arrive in wallets. If not here, then in Asia where the People’s Bank of China has been active in the digital currency arena for many years (their’s is no knee-jerk reaction to Facebook’s plan).

CSFI DCR

Given the history of financial markets and institutions, given that we know that change is inevitable as the structures reshape under social, regulatory and technological pressures, is a Bank of England electronic medium of exchange (whether some sort of cryptocurrency BritCoin or some sort of centralised database BritPESA) the end of the story The answer must be “no”. We are about to enter a new world where competition between currencies will become a new kind of Cold War where the tectonic plates of technology, soft power and economic hegemony are coming together to create a new and unpredictable landscape for the International Monetary and Financial System (IMFS). I hope you will download and enjoy “The Digital Currency Revolution” and I look forward to getting your feedback on my suggestions as to a way forward for the UK in this exciting and interesting “space race” for the future of digital money.

Minted! Canada and Digital Cash

According to Bloomberg, Tim Lane (the Deputy Governor of the Bank of Canada) is “laying the groundwork to introduce a digital currency, should the need for one emerge”. What caught my eye about this story was, of course, that Canada has already had two digital currencies and abandoned both of them! The first was Mondex, the second was MintChip. Let’s have a quick chat about them.

Mondex, eh? 

So for those of you who don’t remember what all of the fuss was about: Mondex was an electronic purse, a pre-paid payment instrument based on a tamper-resistant chip. This chip could be integrated into all sorts of things, one of them being a smart card for consumers. Somewhat ahead of its time, Mondex was a peer-to-peer proposition. The value was transferred directly from one chip to another with no intermediary and therefore no cost. In other words, people could pay each other without going through a third party and without paying a charge. It was true cash replacement.

It was invented at National Westminster Bank (NatWest) in 1990 by Tim Jones and Graham Higgins. In December 1993, (NatWest) launched Mondex in a joint development pilot with Midland Bank (part of HSBC) also in the UK and British Telecom (BT) and began planning their pilot in Swindon. Swindon had been chosen as, essentially, the most average place in Britain. Since I’d grown up there, I was rather excited about this, and while my colleagues carried out important work for Mondex (e.g., risk analysis, specification for secure transfer, multi-application OS design and such like) I watched as the fever grew out in the West Country.

Mondex Billboard

Unfortunately, it just never worked for consumers. It was pain to get hold of – I can remember the first time I walked into a bank to get a card. I wandered in with 50 quid and had expected to wander out with a card with 50 quid loaded onto it but it didn’t work like that. I had to set up an account and fill out some forms and then wait for the card to be posted to me. Most normal people couldn’t be bothered to do any of this so ultimately only around 14,000 cards were issued. I also pulled a few strings to get my mum and dad one of the special Mondex telephones so that they could load their card from home instead of having to go to an ATM like everyone else. British Telecom had made some special fixed line handsets with a smart card slot inside and you could ring the bank to upload or download money onto your card. I love these and thought they were the future!

(My parents loved it too, not because they could use it pay for anything but because you could put the Mondex card into the phone and press a button and hey presto your account balance would be displayed on the phone. This was amazing two decades ago.)

For the poor sods who didn’t have one of those phones (essentially, all Mondex card users) the way that you loaded your card was to go to an ATM. Now, the banks involved in the project had chosen an especially crazy way to implement the ATM interface. Remember, you have to have a bank account in order to have one of these cards and so that meant that you also had an ATM card. So if you wanted to load money onto your Mondex card, you had to go to the ATM with your ATM card and put your ATM card in and enter your pin and then select “Mondex value” or whatever the menu said and then you had to put in your Mondex card. Most people couldn’t be bothered. If you go to an ATM with your ATM card then you might as well get cash, which is what they did.

Anyway, while Swindon hogged the limelight and will forever remain a key milestone on the road to digital cash, Guelph in Canada also had a special place in the hearts of digital currency scholars because the Royal Bank of Canada and CIBC brought the Mondex technology to Canada in 1995 and then in 1997, Bank of Montreal, TD Bank, Canada Trust, Bank of Nova Scotia, National Bank of Canada, the credit unions, and Caisse Desjardins formed Mondex Canada.

 

It got canned at the end of 1998, having never got anywhere near critical mass.

Oh well. Remember Mintchip?

This was developed by the Royal Canadian Mint as a sort of Mondex but in mobile phones instead of smart cards. It was intended as a secure way to send and spend money online, launching the project in April 2012 and showing off its first implementation in 2014.

I was one of the judges for the MintChip Challenge competition. Vitalik Buterin, the inventor of Ethereum, rather kindly mentioned me in dispatches at the time, saying that the Mint has been watching digital currency efforts on the internet for many years now, and “on the board of the MintChip Challenge’s judges are people like David Birch, who has researched Bitcoin extensively and even spoke at the Bitcoin conference in Prague last November.”

In the end, MintChip never made it to the mass market and was sold to nanopay in 2016 when the Mint decided that this central bank digital currency stuff probably wasn’t going anywhere. However, many of that team (with all of the expertise they gained in person-to-person digital cash implement in mobile phones) are still working in the Canadian payments sector today, so could hit the ground running!

So what’s my point?

Well, if the Bank of Canada really does want to lay the groundwork for digital currency, I’d be happy to point them in the direction of a fair few Canadians with some relevant expertise and experience. I might also urge them to make sure that the lessons from those early experiments with virtual Loonies aren’t lost. In particular, there are three lessons that I draw from that time when back with perfect hindsight.

The first lesson is that banks are very probably the wrong people to launch this kind of initiative. Our experiences with (for example) M-PESA, suggest that a lot of the things that I remember that I was baffled and confused by at the time come down to the fact that it was a bank making decisions about how to roll out a new product. The decision not to embrace mobile and Internet franchises, the decision about the ATM implementation, the stuff about the geographic licensing and so on. I can remember when the publicans of Exeter asked the banks to install Mondex terminals in the pubs since all of the students had cards and the bank refused on the grounds that the University’s electronic purse was only for use on campus. Normal companies don’t think like this. 

(There were many people who came to the scheme with innovative ideas and new applications – retailers who wanted to issue their own Mondex cards, groups who wanted to buy pre-loaded disposable cards and so on. They were all turned away. I remember going to a couple of meetings with groups of charities who wanted to put “Swindon Money” on the card, something that I was very enthusiastic about. But the banks were not interested.)

That’s not to say that a central bank is necessarily the best home for digital currency either, but perhaps so sector-wide or cross-sector consortium might be better.

The second lesson is that the calculations about transaction costs (which is what I spent a fair bit of my time doing) actually really didn’t matter: they had no impact on the decision to deploy or not to deploy in any particular application. I remember spending ages poring over calculations to prove that the cost of paying for satellite TV subscriptions would be vastly less using a prepaid Mondex solution rather than building a subscription management and billing platform and nobody cared. I went to present the findings to a bank that was actually funding satellite TV rollout at the time, BT who were providing the backhaul and the satellite TV provider themselves. Nobody cared. The guys at the bank told me that they didn’t have the bandwidth for it (which meant, I think, that they had no interest in spending money so that another part of the bank might benefit). The banks with big acquiring operations were being asked to compete against themselves and so they didn’t care either. The transaction cost, which I thought was the most important factor, really wasn’t one of the drivers.

The third lesson is that while the solution was technically brilliant it was too isolated. The world was moving to the Internet and mobile phones and to online in general and Mondex was trying to build something that was optimised not to use of any of those. At the time of the roll-out, I had an assignment for the strategy department of the bank to provide technical input to a study on the future of retail banking that one of the big management consultancies was working on. I remember being surprised that it didn’t mention the Internet, or mobile phones or (and here’s something that I thought would be big but was also wrong about) digital TV. Most of their work as far I as could see was on redesigning the furniture in the branches.

Mondex was designed to be the lowest-cost peer-to-peer offline electronic cash system at exactly the moment that the concept of “offline” began to fade. It was not alone in failing to react to this fundamental change and it’s an interesting point to consider with hindsight: why did we make systems such as Danmont, Mondex, VisaCash and use them to compete with cash in the physical world rather than use them in the virtual world where there was no cash?

(This was clear to me very early on in the experiment and isn’t hindsight. I drew the same lesson from the Mondex pilots in Canada and the USA as well. The banks put Mondex terminals in places where they already had card terminals that worked perfectly well. You could use Mondex cards in Swindon in the places that acquired bank-issued payment cards, such as supermarkets, but not in places where digital cash had a real competitive advantage: on the Internet, in vending machines and at the corner newsagents.)

I hope I’m not breaking any confidences in saying that I can remember being in meetings discussing the concept of online franchises and franchises for mobile operators. Some of the Mondex people thought this might be a good idea, but the banks were against it. They saw payments as their business and they saw physical territories as the basis for deployment. Yet as The Economist said back in 2001, “Mondex, one of the early stored-value cards, launched by British banks in 1994, is still the best tool for creating virtual cash“.

Now, at the same time that all this was going on at Mondex, there were for mobile operators who had started to look at payments as a potential business. These operators who already had a tamper-resistant smart card in the hands of millions of people and so the idea of adding an electronic purse was being investigated. Unfortunately, there was no way to start that ball rolling because you couldn’t just put Mondex purses into the SIMs, you had to get a bank to issue them. And none of them would: I expect they were waiting see whether this mobile phone thing would catch on or not.

So, for a variety of reasons, Mondex never caught on. It never got even half of the 40,000 hoped-for users in Swindon and usage remained low. And a quarter of a century on, the contactless card and the mobile phone (and in a week the combination of the two in ApplePay and GooglePay) continue to displace cash, we still don’t have a mass market cash alternative on the web (yes, I know, Bitcoin, whatever) and prepaid card propositions, while still expensive (because they use the existing debit rails), are widespread.

Canadian Digital Currency

Should the Bank of Canada simply relaunch Mondex or Mintchip then? Well, a bastard child of Mondex and Mintchip (and let’s not forget contactless pioneer Dexit launched in Toronto as well) is not such a crazy idea.

To a first approximation, everyone in Canada has a smartphone with a tamper-resistant secure chip inside it. And if Canada wants to compete with China, it has to set a high bar! Remember that Mu Changchun (deputy director of PBoC’s payments department) said back in October 2019 that the proposed Chinese digital currency can be used “without an internet connection would also allow transactions to continue in situations in which communications have broken down, such as an earthquake”. He went on to say, accurately, that “even Libra cannot do this” (because Libra, like Bitcoin needs to be online).

Now, if that doesn’t sound like Mondex and Mintchip, I don’t know what does.