Fed-PESA or Fed-Pal or Fed-Coin?

I am not an expert on American politics and I’ve forgotten all the cartoons about how a bill becomes a law and that sort of thing, but I was absolutely fascinated to read in a draft the Democratic Party stimulus proposal for the United States (the ‘Take Responsibility for Workers and Families Act’’, all 1100 pages of which are here) about the use of electronic wallets to make direct stimulus payments. The proposal says that a “digital dollar wallet” shall mean a digital wallet or account, maintained by a Federal reserve bank on behalf of any person, that represents holdings in an electronic device or service that is used to store digital dollars that may be tied to a digital [identity] or physical identity” (my emphasis).

Wow. That’s a pretty interesting vision. None of the components exist, of course, and the digital dollar didn’t make it through to the final 1,400 page version of the proposal. It did, however, reappear in a bill from Senator Sherrod Brown (D-OH), ranking member of the Senate Committee on “Banking, Housing, and Urban Affairs” that again confuses what banks, bank accounts and bank money are by calling on the U.S. Government to

    1. Allow everyone to set up a digital dollar wallet, called a “FedAccount,” a free bank account that can be used to receive money, make payments, and take out cash.

      It wouldn’t really be like a typical bank account of course, it would be more like an M-PESA account because all users would have an account in the same centralised system. Since there are millions of Americans without bank accounts (not because there is a shortage of banks, by the way) but with smartphones, something like this is long over due.

    2. FedAccounts would be available at local banks and Post Offices.

      This must mean account opening would be available in these locations because they have the facilities for rudimentary identity verification. The U.S. has no digital identity infrastructure, so these have to be co-opted. With instant digital onboarding though, the vast majority of the population ought to be able to enroll on in a couple of minutes, download the Fed-PESA app and get to work. There should be instant downloading of the associated debit card to Apple Pay or Google Pay as well.

    3. FedAccounts would have no account fees or minimum balance requirements.

      You could, of course, simply tell commercial banks to provide this service as a public service and as a condition of holding a bank licence. The problem though is two-fold: the banks don’t want to provide such as service and people without bank accounts (for a variety of reasons) don’t want to use. But if the U.S. had electronic money regulations in place, then these accounts could be provided by Walmart or someone else who understands customer service.

    4. Account holders would receive debit cards, online account access, automatic bill-pay, mobile banking, and ATM access at Post Offices.

      All of which cost money, of course, and I’m not sure that debit interchange and interest foregone would be sufficient to pay for these accounts since most of them will be empty most of the time.

    5. FedAccounts can be used to make sure that everyone who is entitled to COVID-19-related relief receives it quickly and inexpensively. That means that people will not have to rely on costly check cashers or other alternative financial services.

      Nor will they need commercial banks (why would I keep an account at a commercial bank when I can get a free account from the government). What’s more, assuming that people can transfer money from one FedAccount to another as easily as people transfer money to each other by WeChat or M-PESA (with a vanishingly small marginal cost) then why wouldn’t merchants accept it?

That last point is, of course, the proximate cause of the interest in the Uncle Sam Account (USA, as I call it) and it did lead me to think that what if the corona crisis does indeed turn out to be a trigger for a digital dollar and universal digital wallets? I’m with Senator Brown in trying to find a 21st century solution at a time of national crisis. That would be amazing. But is this right architecture? Setting aside what might be meant by a “digital identity” for the moment, let us just focus on the digital dollar.

How would it work? Would people really have accounts with or devices from a central bank?

Fed-PESA or Fed-Pal or Fed-Coin?

There are obviously a number of different ways that the digital currency could be implemented by central bank as part of strategy to move to a cashless society (by which of course I’m in a society where cash is irrelevant not where it is illegal). Way back in the 1990s the model that was chosen for the Mondex experiment that began in the UK was to have the central bank control the creation of digital currency but have it distributed by the commercial banks through their existing channels

As I set out in my forthcoming book “The Currency Cold War“, this is only one of the ways of implementing a digital currency. The obvious, and potentially much cheaper, alternative is the Sherrod Brown plan: simply have the central bank create accounts for all citizens, businesses and other organisations. You could imagine something like amperes but on population scale, Bank of England pairs are if you like, in the UK example. This will be cheaper because it will be completely centralised and the marginal cost of transferring value from the control of one personal organisation to another through such a system would be absolutely negligible.

Central banks don’t really want to do this, however, because it would mean having to manage millions of accounts and they would prefer somebody else to do this and deal with everything else that goes with interacting with the general public. The commercial banks and plenty of other non-bank players (think Alipay in China for example) already have the apps, the infrastructure and the innovative approach that would not only bring the digital currency to the mass market but would also open up the potential for the digital currency as a platform for innovation and development.

This is what the Chinese refer to as the “two tier” approach (personally, I insist on calling it the Mondex approach) and I don’t doubt that it will be the approach adopted by commercial banks around the world where that time comes because the problems attendant on the disintermediation of the commercial banks are great. In the Bank of England’s March 2020 discussion paper on “Central Bank Digital Currency” (which is an excellent report by the way), they call this neither the two-tier nor the Mondex approach but the “platform approach” and quite rightly note that one of the key advantages of it is that it will help innovation throughout the “stack”.

Now imagine a merging of something like India’s UPI, M-PESA, social media and the “lifestyle apps” coming from the Far East and you can begin to develop a picture of just how powerful such an implementation might be in all markets. The Bank of England uses some specific terminology which I think makes sense and will allow for constructive discussions between regulators, businesses and innovators in the payments space. In the Bank of England’s platform model it is assumed that the central bank runs the platform (will come back to what the platform means in a moment) and provides what the Bank of England call “API access” to this platform. The people are allowed to access the platform are labelled Payment Interface Providers (“PIPs”) and it is these providers (banks among them course) who interact with users.

This seems to make a lot of sense to me. If anyone can pass on Mr. Brown’s address, I will cheerfully send the Senator a copy of my book hot from the press.

The Real Innovation

The Bank of England are clear that they do not envisage this platform as a cryptocurrency platform (although I can see reasons why this might be appropriate, the Libra-style architecture goes in this direction for example) but they do say that the technologies of a shared ledgers might be the best way to implement the reason it out in my book. Were such a system to come into existence its resilience and availability would become matters of vital national interest Therefore it will make complete sense to take advantage of the new technologies and construct a decentralised and robust solution. It’s quite easy to imagine what this might be. Each bank would have the option of maintaining its own or accessing somebody else’s, all banks above a certain size would be mandated to keep a copy of the ledger and the payment interface providers gateways would simply talk to each other (through the normal protocols of consensus chosen for the particular architecture) but there will be no central system in the middle that could either because of management failings princess usually the case), unforeseen technical problems or subversion by foreign powers.

The paper, which I urge you and Senator Brown to read, goes into a lot of detail about the design of such a viable national system and notes, as I do, that one of the most game changing aspects of such implementation would be what they call “programmable money”, what I called “smart money” in my previous book “Before Babylon, Beyond Bitcoin” and what a variety of ill-informed and misleading observers insist on referring to as “smart” “contracts” although they are in fact neither. This is where the real innovation will take place that will make the money of the future so very different from the money that we have now and I am very keen to see thinking develop in this area. There are obviously overheads associated with overloading the ledger with the distributed applications but on the other hand it may be that there are some truly revolutionary features that can only be delivered through such applications. The bank suggests a compromise whereby certain distributed applications are provided for the use of the PIPs in order to give them infrastructure that they can then use to develop innovative end-user services and this seems a good place to start.

All of which is by way of saying that Senator Brown’s proposal for a sort of Fed-PESA, while being well-intentioned, will tie a boat anchor to U.S. payments system. Far better to create smart money, money with an API, and unleash a next generation of creativity. Personally, I hope that the Bank of England decide to take the global lead in the race to create money for the digital future, rather than continue with digitised versions of money from the analogue past, and I for one would bet on them to succeed.

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.

Digital gold for a digital world?

I went along to the Centre for the Study of Financial Information (CSFI) lunchtime roundtable on “Gold in the Internet Age” because I am fascinated by the link between gold, money and now (of course) digital money. I take my hat off to Andrew Hilton and his crew because the event was outstanding. The panel of experts was as impressive you would expect from the Institute and the audience were well-informed and just as interesting. The panel comprised Haruko Fukada (who used to the run the World Gold Council, WGC) and Jason Cozens of Glint (an electronic gold scheme), Harry Sanderson from the Financial Times, gold market expert Ross Norman and an Andre Voineau from HanETF who have just launched a gold exchange traded product (ETP) with the Royal Mint.

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This is far from my field of expertise but what I learned, if I interpreted the comments correctly, was that it is low Treasury yields rather than the coronavirus or trade wars with China that are behind the rise in gold prices. The Economist made a similar point earlier in the year, noting that while investors typically rush into gold when geopolitical risk soars, the gold price has been rising for a while, climbing by more than 25% since November 2018. The reason is falling real. If inflation-adjusted interest rates rise, gold’s relative attractiveness falls; when they fall, it rises.

I also found out that central banks are buyers of gold at the moment (so you have to wonder what they know that we don’t!) and also that exchange traded funds (ETFs) have been successful at smoothing price fluctuations in the physical gold delivery market. ETFs in fact currently hold around 3,000 tons of gold, which is approximately one year’s worth of production.

I learned a couple more things that help me to refine my mental position on gold. The first was that the “preppers” (some of whom were at the roundtable, judging by some of the comments) don’t want ETFs, “smart” “contracts” or pieces of paper, they want physical metal and the physical metal only. The second was that while China is a massive importer of gold, potentially looking forward to the time when the US dollar is no longer the world’s reserve currency, the digital Renmibi will not be backed by gold and, as I mentioned in my invited closing comments, there has never been any indication of such from the People’s Bank of China.

Oh and I also learned some interesting things about the gold supply chain. For example I learned that with a gold price of $1640 per ounce, the refiners (the refining market suffers from gross overcapacity) make approximately $0.10 per ounce.

Then on to a couple of businesses working with “digital gold” of one form or another. Jason talked about how Glint is getting along. I remember going to see Jason and Haruko three or four years ago when Glint was just getting off the ground because I was at the time looking at a project (which in the end didn’t go anywhere) to create an Islamic payment product based on gold in the Dubai depository. It wasn’t a new idea then – here’s what I wrote about it in 2007: “Given the desire to transact with the convenience of a card but in a non-interest bearing currency, it would seem to be a straightforward proposition to offer a gold card that is actually denominated in gold.  An Islamic person tenders their chip & PIN gold card in Oxford Street to buy a pair of shoes: to the system it’s just another foreign currency transaction that is translated into grams of gold on the statement”.

Anyway Jason said that Glint is now live in 33 countries, including the USA, and is growing steadily. Essentially, you open a glint account and then you add money to this account which is used to buy actual gold and you have a claim over that gold. The gold backs a payment card so that you can spend your gold with ease. The Glint card is a prepaid MasterCard, issued by Sutton Bank, so that you can spend your gold anywhere that MasterCard is accepted. They are launching their peer-to-peer platform in a few weeks time.

I was reminiscing after the event with a couple of the people there because I remember some of the pioneering work in this space by James Turk of Goldmoney and Douglas Jackson of E-Gold, both of whom I spoke to many years ago about digital gold. Douglas was responsible for one of my all-time favourite quotes from the electronic money world when, a few years ago, I was chatting with him about the trajectory of the gold and he said, in answer to my questions, “it was all going very well, right up until I got indicted by the federal grand jury”. (Here’s a podcast I made with Douglas a few years ago.)

(There are other people who want to turn gold into a currency for idealogical purposes, of course. An example is ISIS, who created a physical gold currency for their new Caliphate. It didn’t really work out that well because all their international trade, including oil, was executed in U.S. dollars. So in spite of the group’s declared war on U.S. hegemony, its economy was actually facilitating U.S. dollar dominance.)

So, what do I think about gold now, after this excellent update?

Gold can serve as a unit of account, means of exchange, store of value and a mechanism for deferred payments. All well and good. However, the digital world is not an electronic version of the analogue world. It is different. It does not have the dynamics of the physical world, and this applies to money just as much as it applies to everything else. This is not a new thought by the way. In fact it was one of the first things that occurred to me when I first began thinking about electronic cash way back in the 1990s. For example, I talk about this unbundling in a paper I wrote called “E-Cash, So What?” that I presented at a Unicom conference “Digital Cash and Micropaymens” in London 1997.

In this paper I noted that money has several different functions in society and gave the standard set of definitions, beginning by noting that as just about every economics book in the world has done, that money has four basic functions:

  • A Unit of Account. The unit of account does not, of course, have to have any physical reality (see, for example, Libra).
  • An Acceptable Medium. Money is useless as a medium of exchange unless it is acceptable to both parties to a transaction.
  • A Store of Value. Unfortunately, inflation can erode the value of stored money no matter what medium is chosen!
  • A Means for Deferred Payment. In order for a society to function, it must support contracts between parties that include provision for future payment.

One of the reasons why I remain slightly sceptical of “digital gold” is that it is the nature of digital to “unbundle” functions of money so that there is no economic niche for the maximum bundle that gold provides any more.

Unbundling

Now, we think of these functions as facets of the same thing (eg, the Pound Sterling) but in the past each of these functions could have been implemented in a different way. In my book “Before Babylon, Beyond Bitcoin” I use the example of the American colonies at the turn of the 18th century. The colonists used sea shells (known as “wampun”) for their medium of exchange, a form of cash borrowed from the Native Americans (who were, in effect, the central bankers of this monetary system, converting the shells into animal pelts which were used to store wealth and for external trade). The unit of account was the English Pound (despite the fact that most of the colonists had never even seen one) and the means for deferred payment was bullion.

A contract, then, might run like this: Person A would contract with Person B to pay “£1 in gold per annum for rent of the field” or whatever. When the rent fell due, it would be commuted to £1 worth of wampun (since no–one actually had any gold or silver, as the English refused to export bullion to the colonies). Accumulated wampun was traded for beaver pelts and these were kept as a store of value.

The economy worked and the “money supply” was based on commodities (the pelts, generally) and stable for many years, until over–harvesting lead to a decline in the beaver population: as pelts became scarce, the “exchange rate” for wampun against pelts rocketed, eventually rendering it a useless medium for exchange.

(The reason why that in the American colonies bullion for coins was scarce because Britain wouldn’t export any, an action that led to one of the great revolutions in money: the issuing of banknotes not as a means of substituting for some otherwise inconvenient means of exchange but as a means of creating money. Starting with the Massachusetts Bay Colony in 1690, banknotes were issued by impoverished authorities to avoid the high costs and uncertainties associated with borrowing and the need to impose taxation.)

Since the time of the American rebellion, the financial system developed in such a way as to do away with wampun and beaver pelts and bullion to the point where the Federal Reserve dollar dollar bills yo are used for everything. But that’s not a law of nature. I came to that understanding from a technical perspective, so didn’t realise that proper economists already knew that technological change would mean that each of these functions of money could be implemented using a different technology, with each function of money implemented using the technology optimal for that purpose. In fact it will be another example of going back to the future, as the functions of money used to be implement quite separately in the past.

Rebundling

Now I discover that proper economists are also interested in the “rebundling” of the functions of money along with other functionality. In their superb National Bureau of Economic Research paper on “The Digitalization of Money” (working paper 26300, September 2019) Markus Brunnermeier, Harold James and Jean-Pierre Landau discuss how innovation unbundles the functions of money and, as they put it, renders the competition between currencies “much fiercer”. Then they go on to discuss the role of platforms (ie, two-sided markets where buyers and sellers exchange multiple products) and explore their interaction with digital currencies.

Their point is that digital currencies associated with platforms (what I called a form of “community currency” in my book) will be far more differentiated than currencies are today because they will differ not only in their monetary functions but also in the functions provided by the associated platforms. As they put it, “a currency’s appeal will likely be governed by other platform features such as information processing algotithms, its data privacy policies and the set of counterparts available on the platform”. This is a really interesting perspective on the dynamics of digital currency and has set me thinking about how both governments and businesses will deal with the digital currencies.

Privacy? Reputation? Relationships? It’s almost as if it’s identity that is new… well, you know.

(After the roundtable, I began to wonder that if ETFs hold approximately one years worth production of gold and have helped to contribute to a functioning market, I wonder if ETF’s holding a years worth of bitcoin production could have a similar impact on the crypto currency market. This led me somewhat and productively have to say to try to work out what a years worth of production of bitcoin’s is before I abandoned the project on the grounds that the answer was irrelevant because bitcoin is a thin and opaque market this and ETF’s would be trivial to manipulate.)

A digital currency in Cold War? Yes.

News arrives from the fancy schmancy St. Moritz Crypto Finance Conference that the super rich investment persons there discussed the global cryptocurrency and digital currency scene. One particular phrase caught my eye. Multicoin Capital’s Beijing-based partner Mable Jiang said China’s goal is to leverage the rise of cryptocurrency to “supplant the dollar and become the world’s leading economic power” and then went on to say that “It’s a kind of Cold War… Currency is the leverage”.

Cold War.

Interesting choice of language.

The former Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo, who according to the Wall Street Journal is known as “Crypto Dad”, recently became co-founder of the Digital Dollar Foundation to advocate for a central bank digital currency (CBDC) for the U.S. He said that the term Cold War was a bit “strong” for the disparity between the U.S. and China in the digital currency space. To be fair, however, he didn’t know about my new book on the topic. My book “The Coming Currency Cold War—Cash and Cryptography, Hash Rates and Hegemony” will be published in June and launched at Money20/20 in Amsterdam.

Crypto Dad went on to say that he generally agreed the economic rivalry around digital currency was reminiscent of “the race to land on the moon”.

Another interesting choice of language.

Here’s a short extract from the book…

The important of digital currency therefore extends far beyond narrow issues of payments efficiency and wallet brand and into the wider economy. Hence it becomes a lever in economic competition. The analyst Dan Wang set the context for this competition in stark terms saying that:

China finds it politically intolerable that the US has an at-will ability to cripple major firms like ZTE and Huawei. It’s now a matter of national security for China to strengthen every major technological capability. The US responded to the rise of the USSR and Japan by focusing on innovation; it’s early days, but so far the US is responding to the technological rise of China mostly by kneecapping its leading firms. So instead of realizing its own Sputnik moment, the US is triggering one in China.

I found Dan’s reference to Sputnik rather interesting, since he is not the only observer who sees economic competition in those terms. This makes digital currency a key element of national strategy. Indeed, the race for hegemonic digital currency may be best understood in those terms. Writing a couple of years before Dan, Erik Townsend said in “Beyond Blockchain: The Death of the Dollar and Rise of Digital Currency” said that “de-dollarization is a catalyst leading to a new space race”, expressing a similar sentiment about the importance of driving forward the technology to obtain leadership.

Looks like we’re all on the same page. Or, in my case, the same couple of hundred pages. You can pre-order the book here at the London Publishing Partnership.

Digital currency is getting serious

North Korea is, apparently, developing a digital currency of its own. According to Alejandro Cao de Benós, President of the Korean Friendship Association, the Democratic People’s Republic of Korea intends to go down the Facebook route by creating an asset-backed digital currency rather than a digital fiat currency and then use some sort of blockchain with “Ethereum-style smart contracts” to do business and avoid sanctions.

Why use a blockchain? Well, the regime sees such “smart” “contracts” as a way to enforce deals it makes with foreign counterparties. Since it doesn’t trust the U.N., it relies on Chinese intermediaries to enforce deals abroad. But sometimes, so sources claim, those intermediaries cheat the North Koreans. Hence, they want to bypass intermediaries altogether by developing a  “token based on something with physical value” (eg, gold) in order to create a stable mechanism for payments in international trade between the regime and “other companies/individuals” (although it will not be available to individuals in the DPRK, who will be stuck with the Korean Won).

(This is not a new idea, by the way. A couple of years ago, the Venezuelans tried a similar idea “the petro”, a digital currency to be backed by the country’s natural resources — diamonds, gas, gold and oil — to beat the “financial blockade” imposed by the U.S. and others. I will check the world currency markets later on, but my general sense of the matter is that the petro is yet to topple the Swiss Franc. It, may, however have served as a useful input to other regime’s feasibility studies.)

This is why U.S. (and other countries) care whether the North Koreans launch an eWon that stops them from being cheated in international transactions. As the Financial Times points out, the U.S. has a genuine and well-founded concern that, the financial implications of a change to U.S. currency hegemony to one side, foreign countries will increasingly use digital currencies, “such as Facebook’s planned Libra coin“, to avoid sanctions. Indeed, this was one of the arguments that David Marcus uses. He says, for example, that a Chinese digital currency running on a Chinese permissioned blockchain could mean the potential for “a whole part of the world completely blocked from U.S. sanctions and protected from U.S. sanctions and having a new digital reserve currency”.

Sanctions are a serious thing and cryptocurrency doesn’t have a magic shield against them. An Ethereum developer was recently arrested for violating U.S. sanctions against North Korea. According to the U.S. Department of Justice, one Virgil Griffith was arrested at Los Angeles airport and charged with violating their International Emergency Economic Powers Act (“IEEPA”) by travelling to North Korea to give a presentation about using cryptocurrency to evade sanctions. As observers pointed out, Mr. Griffith may have evolved a sub-optimal communications strategy in connection with his travel plans.

A North Korean digital currency has every chance of succeeding under the stewardship of the Korean Worker’s Party and the divine tutelage of Kim Jong-Un, the Dear Leader. His father, the previous Dear Leader, most famous for being the greatest golfer in history, was responsible for an earlier experiment in radical transformation through money, when the DPRK fell into chaos after his government revalued the currency and restricted the trading in of the old money (thus wiping out the personal savings of counter-revolutionary running-dog lackeys of U.S. imperialism).

When the North Korean people were not eating tree bark to stay alive, they must surely have noticed that the revaluation of the unit of account didn’t make the slightest difference to the supply and demand for goods and services. It made a difference to the market, though. The revaluation and exchange limits triggered panic, particularly among market traders with substantial hoards of old North Korean won — much of which became worthless. Gresham’s Law took immediate effect: the KRW disappeared from the marketplace and people began to use whatever hard currencies they could get their hands on. The Dear Leader therefore launched an attack on this as well, banning everyone (including foreigners) from using foreign currencies such as euros or dollars. The authorities started a TV campaign asking good citizens to report anybody using dollars directly and I imagine that the same will apply to digital dollars or electronic euros.

So, if a North Korean digital currency based on gold or whatever does appear, would it help the regime and others to avoid sanctions? Well, it depends. It is certainly possible to design digital currencies that have unconditional anonymity that Bitcoin (for example) does not. Perhaps this is what Mr. Griffith was explaining to the North Koreans in Pyongyang, although to be honest they could have discovered this for themselves on the Internet without too much trouble. So let’s imagine that they do indeed create such a beast, a bastard child of ZCash and Quorum. What will happen? Well, in a recent “war-game” of this scenario hosted by the Economic Diplomacy Initiative and co-sponsored by the Belfer Center for Science and International Affairs at Harvard (involving U.S. administration veterans, diplomats and academics), the rise of an encrypted digital currency attacked the dollar’s international position and ended up allowing North Korea to bypass sanctions and build an intercontinental ballistic missile. Ruh roh, as they say on the internet.

(The North Koreans have other options for disruption using digital currency, by the way. See John Cooley’s book on counterfeiting Currency Wars, which is about various attempts to destabilise countries by forging their currencies. He talks a lot about North Korea’s “superdollar” forgeries and the like. Now, think what the coming version of this might be: not counterfeiting physical money, but creating electronic money. I can’t help but wonder whether the shift to digital money for retail and person-to-person payments will make a modern-day Operation Bernhard — Hitler’s plan to undermine the British economy by forging £5 notes — easier or harder?)

The Foundation for Defense of Democracies (FDD), a Washington think tank, summarise the situation quite well in their position paper “Crypto Rogues” observing that “blockchain technology may be the innovation that enables U.S. adversaries for the first time to operate entire economies outside the U.S.-led financial system”. Now, while this may be technically slightly inaccurate (there are ways to create anonymous transactions without a blockchain, but let’s take this use of “blockchain” to mean “third-party anonymous digital currency”) it does accurately flag up that the widespread availability of decentralised financial services threatens to bypass the existing infrastructure. The FDD are surely right to say that “blockchain sanctions resistance is a long-term strategy for U.S. adversaries”.

Now, whether using the blockchain to create an immutable record of sanctions-busting transactions is a good idea or not I couldn’t say, but as a general rule I’m someone who believes in the democratic process and therefore I’d prefer it if sanctions could not be so easily evaded. Especially when you consider why the sanctions are there in the first place.

(A recent U.N. report estimates that North Korea has generated some $2 billion for its weapons of mass destruction programs using “widespread and increasingly sophisticated” cyberattacks to steal from banks and cryptocurrency exchanges. It makes you nostalgic for the days when hackers were stealing credit card numbers to access porn.)

No-one would imagine that a digital currency by itself would render sanctions ineffective. When the Iranian regime, for example, set up a venture to explore Bitcoin payments with a Swedish startup, the Swedish banks refused it a bank account because they themselves did not want to become subject to secondary sanctions. As US Treasury Secretary Mnuchin said at the G7 in July (talking about Iran), “If you want to participate in the dollar system you abide by US sanctions”. There is no doubt, though, that moving transactions outside of the international monetary and finance system could help to make other sanctions-evading tactics more effective by making it more difficult to track, trace and monitor transactions.

Stablecoins and stable coins

I notice that in the considerable press comment concerning the possible introduction of a Facebook payment system and perhaps even a Facebook currency of some kind, commentators continually refer to a Facebook “stablecoin”. I am certain that they are wrong to use this term, because it does not mean what they think it means. I may well be facing a losing battle about this, but I am stickler for correct currency terminology.

So. Stablecoin. What?

In the Bank of England’s excellent “Bank Underground” blog, there was a post on this topic that said “The chances of a stablecoin keeping a stable price depends on its design. There are generally two designs of stablecoin: those backed by assets, and those that are unbacked or ‘algorithmic’”. They are right, of course, but I would like to present slightly more granular classification of stablecoin currencies. I think there are three kinds:

  1. Algorithmic Currencies, in which algorithms manage supply and demand to obtain stability of the digital currency. This is what a stable cryptocurrency is: since a cryptocurrency is backed by nothing other than mathematics, it is mathematics that manages the money supply to hold the value of the steady against some external benchmark. This is what is meant by stablecoin in the original crypto use of the term.

  2. Assetbacked Currencies, in which an asset or basket of assets are used to back the digital currency. I don’t know why people refer to these a stablecoins, since they are stable only against the specific assets that back them. An asset that is backed by, say, crude oil is stable against crude oil but nothing else.

  3. Fiat-backed (aka Currency Boards), which are similar to a asset-backed currencies but where the assets backing the digital currency are fiat currencies only. There are mundane versions of these already: in Bulgaria, for example, where the local currency (the Lev) is backed by a 100% reserve of Euros

As for that last category, it is effectively what is currently defined as electronic money under the existing EU directives, and therefore already regulated. Those coins backed by fiat currency, such as JPM Coin, simply provide a convenient way to transfer value around the internet without going through banking networks. Now, this may well be an advantage in cost and convenience for some uses cases but it is a long way from an algorithmic currency. If this is indeed what Facebucks turn out to be (ie, actual bucks that you can send around on Facebook, something along the lines of Apple Cash), then I have written before why I think they will be successful.

So will any or all of these catch on?

Predictions are of course difficult, but my general feeling is that it is the asset-backed currencies that are most interesting and most likely to succeed in causing an actual revolution in finance and banking. Algorithmic stablecoins and fiat “stablecoins” exist to serve a demand for value transfer, but this is increasingly served well by conventional means. I notice this week, for example, that Transferwise can now send money from the UK to Hong Kong in 11 seconds, a feat made possible by their direct connection to the payments networks of both countries. Why would I use a fiat token when I can send fiat money faster and cheaper?

Of course, you might argue that a digital currency board might allow people who are excluded from the global financial system to hold and transfer value but I am unconvinced. There plenty of ways to hold and transfer electronic value (eg, M-PESA) without using bank accounts. Generally speaking, people around the world are excluded because of regulation (eg, KYC) and if we want to do something about inclusion we should probably start here. If you are going to require KYC for the electronic wallet needed to hold your digital currency they customers may as well open a bank account, right?

(I’ve written before about how the need for an account hampered Mondex. When it was first launched, I went to a bank branch with £50 expecting to walk out with a Mondex card with £50 on it. What I actually walked out with was a multi-page form to open a bank account so that I could get a Mondex card which arrived some time later. And since I had to put my debit card into the ATM in order to load the Mondex card, I did what most other people did and drew out cash instead.)

I suppose there are some people who think that the anonymity and pseduonymity of cryptocurrencies might make them an attractive alternative to certain sectors, but this is probably a window. If cryptocurrencies were used for crime on a large scale then efforts would be made to police them. Bitcoin, in particular, is not a good choice for criminals since it leaves a public and immutable record of their actions but you can imagine a future in which the mere possession of an anonymous cryptocurrency becomes a prima facie cash of money laundering.

Looking at the “stable” stable, then, I’ll put my money on the middle way. I’ve said it before and I’ll say it again, there is a real marketplace logic to the trading of asset-backed currencies in the form of tokens and I expect to see an explosion of different kinds.

FaceCoin or FacePESA, Zuckbucks are a winner

Around a decade ago my son was, as is rather the fashion with teenagers, in a band. With some friends of his, he arranged a “gig” (as I believe they are called) at a local venue. There were five bands involved and the paying public arrived in droves, ensuring a good time was had by all. All of this was arranged through Facebook. All of the organisation and all of the coordination was efficient and effective so that the youngsters were able to self-organise in an impressive way. Everything worked perfectly. Except the payments.

eden_first_gig

When it came to reckoning up the gig wonga (as my old friend Paul Pike of Intelligent Venues would call it), we we had a couple of weeks worth of “can you send PayPal to Simon’s dad” and “he gave me a cheque what I do with it?” and “Andy paid me in cash but I need to send it to Steve“ and so on. Some of them had bank accounts, some of them didn’t. Some of them had bank accounts that you could use online and others didn’t. Some of them had mobile payments of one form or another and others didn’t. I can remember that at one point my son turned to me and asked “why can’t just send them the money on Facebook?”.

As I wrote at the time, I didn’t have a good answer to this because I thought that sending the money through Facebook would be an extremely good idea and I can remember discussing with some clients at the time what sort of services they might be able to offer to Facebook or other social networks that were empowered through an Electronic Money Issuing (ELMI) license and Payments Institution (PI) licence. The rudimentary business modelling was quite positive, and so I naturally assumed that there would be some sort of Facebook money fairly soon, especially because I am something of a proponent of community monies of one form or another.

I also wrote at the time that Facebook money, or Zuckbucks ($ZUC), could easily become the biggest virtual currency in the world given that there are so many people with Facebook accounts and the ability to send value instantly from one account to another via Facebook would be so attractive. You’ll remember that Facebook launched “Facebook Credits” so time ago but they weren’t really a currency, just a way of prepaying for virtual goods with the service. A virtual currency is something more, it’s true electronic money that you can send from one person to another. Well, it looks as if this is coming, as I read in the crypto press that Facebook “is talking to exchanges about potentially listing a cryptocurrency” [CoinDesk]. It looks as $ZUC might be just around the corner, and people are getting excited.

As I understand things, Mr. Zuckerberg has already decided integrate the social network’s three different messaging services — WhatsApp, Instagram and Facebook Messenger — on a single unified messaging platform and, according to the New York Times, have that platform implement end-to-end encryption. This would naturally be an ideal platform for a universal currency so it’s no surprise to hear that the company is now looking at just such an enterprise. Even if Facebook couldn’t read the details of a transaction, it would know that I just paid a car insurance company and might find some use for the data in the future.

My suspicions that a Facebook money might me rather successful were further strengthened while listening to one of my favourite podcasts, Pivot with Kara Swisher and Scott Galloway, on a plane last week. Scott said that his biggest friction in the physical world is charging (I couldn’t agree more – battery life is the bane of my road warrior existence) and that his biggest friction in the virtual world is payment. He cited the example of trying to buy wifi on a flight and having to mess around typing in card numbers like it was 1995 and pointed out just how much Facebook could gain by adding payments to their platform. Scott is surely right, and since the people at Facebook are smart, they must be looking at the potential to develop a new revenue stream that is separate from advertising with some enthusiasm.

Barclays equity research note on the subject (Ross Sandler and Ramsey El-Assal, 11th March 2019) reckon that a successful micro-payment service could add some $19 billion to Facebook’s revenues, so clearly I’m not the only one who is a little surprised that they haven’t already leveraged the technologies of strong authentication to get something off the ground already. It also notes that one of the problems with the original Facebook Credits business was the cost of interchange, a problem that has a very different shape now with interchange caps in place in various parts of the world and open banking giving the potential for direct access to consumer bank accounts (so that exchanges between fiat bank accounts and $ZUC would be free).

Facebook Marketplace has just added card payments [91Mobiles], as shown in the screenshot below, so that marketplace users can pay for goods directly without having to come out of Facebook. I think this is, frankly, a window into a one possible future for financial services!

These are boring old Visa and Mastercard payments, but presumably $ZUC can’t be far behind. Unfortunately, since there are no details that I can find on what exactly “Facebook Coin” is going to be, I can’t really offer any informed comment on the chosen implementation. If, however, it is something along the lines of JPM Coin then it will be a form of electronic money and governed by the appropriate rules and regulations (which is good, and since they have very smart people at Facebook I’m sure they’ve already spotted the advantages of providing a trusted, regulated global payment service). You can kind of see the idea: your Facebook account sprouts an automatic, opt-out, wallet. You can buy coins for this wallet using a debit card and then send them to anyone else with a wallet (why this needs the blockchain is not entirely clear, by the way, but that’s another discussion).

Wallets that have been KYC’d (put to one side what exactly this might entail) could store up to say $ZUC 10,000, wallets without KYC would be limited to say $ZUC 150. I think this might be a great opportunity for banks to use their federated and standardised digital identity infrastructure* to provide an attractive service to Facebook that might relieve them of onerous regulatory burdens. All Facebook has to do is get me log in to my bank and have them return some cryptographic token (with no personal information in it) to Facebook to indicate that the bank has done KYC and knows who I am. A bit of a win win.

This, at a stroke, would provide teenagers with a means to settle gig wonga, provide online retailers with instant payment across borders and provide brands a mean to reward consumer behaviour. If Facebook make it free to buy ZUC$ and guarantee to redeem at par for consumers, they could be on to a real winner. In Europe, if the Facebook wallet is combined with PSD2 to deliver instant load and instant payout, it delivers a serious play that will give people are reason to use the Facebook platform to organise their gigs, lay out their online wares and promote their brands instead of messing around with Snapchat or Youtube or email or blogs or whatever else they are using now.

* Note: does not exist. Images not from actual gameplay. 

CBDC is a black and white issue

I was reading J.P. Koning’s excellent paper [PDF] on Central Bank Digital Currency (CDBC) for Brazil and came across his reference in passing to Narayana Kocherlakota, former CEO of the Federal Reserve Bank of Minneapolis, who wrote (in 2016) that economists do not know very much about the topic of anonymity and “calls for the profession to model it more systematically”. I think this is a really critical point, because the decision about where to set the anonymity dial for a cash replacement product is an important one, and not one that should be left to technologists.

This decision is discussed in the context of implementing a digital fiat currency of one form or another. The paper explores three ways to implement a CBDC for Brazil.

  1. MoedaElectronico (Electronic Cash): this is the most cash-like of the three CBDCs. It pays neither positive interest nor docks negative interest and is anonymous. Like cash, it is a bearer token.

  2. ContaBCB (BCBAccounts): this is the most account-based of the three templates. Ac- counts are non-anonymous and pay interest, like a normal bank account.

  3. MoedaHíbrida (Hybridcoins): provides a mix of cash and account-like features, including the ability to pay a varying positive and negative interest rate, while offering users the choice between anonymity or not. 

Now, the first two are well-known and well-understood. I wrote about them again last month (I’ve discussed “BritCoin” and “BritPESA” several times before), in a comment on Christine Lagarde’s speech [15Mb: Central banks, tokens and privacy] and I don’t propose to look at them further here. It’s that last example that interests me.

Let’s go back to that point about anonymity. In the paper J.P. says that the case can also be made for a permanently negative interest rate on anonymous CBDC. Why? Well, since we all understand that criminality and tax evasion impose costs on society, it may be worthwhile to design anonymous payments systems in a way that recoups some of the costs these activities impose.

In other words, construct a cash replacement in which anonymous transactions cost more than non-anonymous transactions. One way to do this, which is referenced by J.P. in his paper, was the “Crime Pays System” or CPS as conceived by the artist Austin Houldsworth. Austin is most well-known for designing the cover of my book “Before Babylon, Beyond Bitcoin” of course, but he also ran the Future of Money Design Award for Consult Hyperion’s annual Tomorrow’s Transactions Forum for many years. Oh, and he was awarded a Ph.D by the Royal College of Art (RCA). It was his idea to have me present CPS at the British Computer Society (BCS). We had my alter ego set out the new payment system to an unsuspecting audience who, I have to say, were excellent sports about the whole thing! It turned out to be an entertaining and enlightening experience (you can read more and see the video here).

Cps bcs

In CPS, digital payments would be either “light” or “dark”. The default transaction type would be light and free to the end users. All transaction histories would be uploaded to a public space (we were, of course, thinking about the Bitcoin blockchain here) which would allow anybody anywhere to view the transaction details. The alternative transaction type would be dark. With this option advanced cryptographic techniques would make the payment completely invisible with a small levy in the region of 10% to 20% would be paid per transaction.

The system would therefore offer privacy for your finances at a reasonable price. The revenue generated from the use of this system would be taken by the government to substitute for the loss of taxes in the dark economy.

What a cool idea.

Now, at the time it was just a concept. We didn’t spend much time thinking about how it would actually work (I was basing the pretend implementation for the BCS presentation on Chaumian blinding a la Digicash, hence this gratuitous picture of me influencing David in Vegas.)

David Chaum las vegas 2018

That was then. In the meantime, however, along came ZCash and the mechanism of shielded and unshielded transactions that J.P. has used as the basis for MoedaHíbrida’s two different modes. If the user decides to hold shielded (ie, dark) MoedaHíbrida tokens, then all transactions made with those tokens are completely anonymous and untrackable. The user can decide to unshield his or her MoedaHíbrida tokens so that all transactions can be seen (ie, light).

Offering users the choice of anonymity but making them pay for is a radical solution but I’m with J.P. in thinking that it deserves attention. What I think is very clever about using negative interest rates (which had never occurred to me) is that it allows for anonymous transactions without imposing a transaction friction, thus providing the cash substitute in the marketplace, but it penalises the stashing of anonymous cash. The negative interest rate means that dark tokens will be subject to a negative interest rate of, say -5% per annum, while light tokens will receive a competitive SELIC-linked interest rate.

Whether or not this is the way forward I or not, it is a line of thought that deserves serious examination in the context of CBDC design. If it is considered important to society to provide anonymous means of exchange, then the “tax” on the anonymous store of value seems a reasonable way to distribute the costs and benefits for society as whole.

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.

The euro, my part in its downfall

I once had lunch with Italian anti-euro nationalists. They had invited me because I was in Rome to give evidence on cryptocurrency to a committee in the Italian Parliament and they wanted to ask me about parallel and complementary currencies (yes, really). Here I am in from of the Italian Parliament building, Montecitorio, for the public hearing. 

Getting ready to visit

(The nice people at  Cashless Way made a photo album of the day for you if you want to see more.)

My host for this day was Geronimo Emili (below) from the “War on Cash”. I won’t go into the discussions — they have been covered elsewhere (e.g., here) — but I focused my contribution on the radical and innovative nature of the Bitcoin protocol while remaining sceptical about the potential for Bitcoin as a currency (although I did support the idea that new kinds of currency are around the corner). I think the past four years have reinforced my summary comments to the hearing, which were broadly that Bitcoin is a genuine technological breakthrough and it will cause a revolution, but probably not in payments.

Geronimo Emili

After that, it was off to lunch with (if memory serves) the Deputy Leader of one of the political parties that was in favour of more autonomy for the North. We had a very interesting conversation – through a translator – about the potential for new technology to make regional and city currencies a practical possibility. I’m rather in favour of having more currencies and particularly more currencies that are more closely linked to the values and needs of communities. There is a general argument in favour of a regional approach to currencies in a mobile-phone powered always-on digital age. I first heard it clearly expressed by the late Sir Richard Body MP. Sir Richard was a noted eurosceptic, supporter of an English parliament and, rather famously, one of the “bastards” referenced by John Major. He was also very interested in the theory and practice of money and at the second annual Consult Hyperion Forum (back in 1999) he gave an eloquent explanation as to why regional currencies with floating exchange rates would lead to more efficient resource allocation and more beneficial resource distribution than government transfer payments do.

I think I may have mentioned this at lunch.

Although I thought no more about it at the time, it looks as if I may have inadvertently conspired to destroy the euro, as I now read that the anti-euro Lega nationalists and the alt-Left Five Star Movement are planning to go around the euro and create a rival payment structure based on ‘IOU’ notes. This would subvert the monetary control of the European Central Bank and might well set off a chain reaction in Catalonia, Scotland and perhaps even London.

Oh well.