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. 

Not a cryptocurrency. End of.

The media recently reported, somewhat breathlessly (eg, CNBC), that JP Morgan Chase (JPMC)is launching a “cryptocurrency to transform the payments business”. This sounded amazing so I was very excited to learn more about this great leap forward in the future history of money.

As CNBC reported, it seems to herald new forms of business. Umar Farooq, the head of JPMC’s blockchain projects, sets put this vision clearly, saying that the applications for this innovative use of new transaction technology “are frankly quite endless; anything where you have a distributed ledger which involves corporations or institutions can use this.

Wow.

Now, many people took a look at this and pointed out that it is simply JPMC deposits by another name, and uncharitable persons (of whom I am not one) therefore dismissed it as a marketing gimmick. But it is more interesting than that. Here is the problem that it is trying to solve…

Suppose I am running apps (referred to by less well-informed media commentators as “smart” “contracts” when they are neither) on JPMC’s Quorum blockchain. Quorum is, in the terminology that I developed along with Richard Brown (CTO of R3) and my colleague Salome Parulava, their double-permissioned Ethereum fork (that is, it requires permission to access it and a further permission to take part in the consensus-forming process). I’m quite partial to Quorum (this is what I wrote about it back in 2017) and am always interested to see how it is developing and helping to define what I call the Enterprise Shared Ledger (ESL) software category.

Now suppose my Quorum app wants to make a payment – not in imaginary internet play money, but in US dollars – in return for some service. How can it do this? Remember that our apps can’t send a wire transfer or use a credit card because they can only access data on the blockchain. If the app has to pay using a credit card, and that app could be executing on a thousand nodes in the blockchain network, then you would have a thousand credit card payments all being fired off within a few seconds! You can see why this can’t work.

One way to solve this problem would be to have “oracles” reporting on the state of bank accounts to the blockchain and “watchers”  (or “custom executors” as Darius calls them here) looking for state changes in the blockchain bank accounts that they could then instruct in the actual bank accounts. But that would mean putting the safe-to-spend limits for millions of bank accounts on to the blockchain. Another more practical solution would be to add tokens to Quorum and allow the apps to send these tokens to one another. This is, as far as I can tell from a distance, is what JPM Coins are for.

I have to say that this is a fairly standard way of approaching this problem. A couple of months ago, Signature Bank of New York, launched just such a service for corporate customers — with a minimum $250,000 balance — using another permissioned Ethereum fork, similarly converting Uncle Sam’s dollars into ERC-20 tokens. If you’re interested, I gave a presentation to the Dutch Blockchain Innovation Conference last year on this approach and why I think it will grow and the video is online [23 minutes].)

Animal, vegetable or mineral?

These JPM Coins (I simply cannot resist calling them Dimon Dollars, or $Dimon, for obvious reasons) have attracted considerable discussion but I thought I might contribute something different to the debate by trying to reason my way through to a categorisation. I talked about this on the panel in the “Blockchain and Cryptocurrencies” session at Merchant Payments Ecosystem in Berlin today, and you can see my slides here:

 

On the panel, I said that the $Dimon is e-money. Here’s why…

Is it “money”? No it isn’t. It is certainly a cryptoasset – a digital asset that has an institutional binding to a real-world asset – that in certain circumstances exhibits money-like behaviour. Personally, I am happy to classify such assets as forms of digital money, the logical reason that they are bearer instruments that can be traded without clearing or settlement. 

Is it a “cryptocurrency”? No, it isn’t. A cryptocurrency has a value determined, essentially, by mathematics in that the algorithm to produce the currency is known and the value of the cryptocurrency depends only that known supply and the unknown demand (and, of course, market manipulation of various kinds). It is not set by an institution, government or otherwise.

Is it a “stablecoin”? No, it is isn’t. A stablecoin has its value maintained at a certain level with reference to a fiat currency by managing the supply of the coins. But the value of the $Dimon is maintained by the institution of JP Morgan irrespective of the demand for it.

Is it a “currency board”? No, it isn’t. A currency board maintains the value of one currency using a reserve in another currency. So, for example, you might have a Zimbabwean currency board that issues Zim Dollars against a 100% reserve of South African Rand.

In fact, as far as I can tell, the $Dimon is e-money, which is one particular kind of digital money. There are two main reasons for this:

First, according to the EU Directive 2009/110/EC, “Electronic money” is defined as “electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions […], and which is accepted by a natural or legal person other than the electronic money issuer”. This sounds awfully like, as Bloomberg put it, the $Dimon is “a digital coin representing United States Dollars held in designated accounts at JPMorgan Chase N.A.”. It is a bearer instrument (so “coin” is a reasonable appellation) that entitles the holder to obtain a US dollar from that bank and therefore seems to fall within that EU definition since people other than JPMC, albeit customers of JPMC, accept it in payment. (I would pull back from calling it digital cash because of this need to establish an account with JPMC in order to hold it.)

Second, because my good friend Simon Lelieveldt, who knows more about electronic money than almost anyone else, says so. Simon and I have long agreed that the trading of digital assets in the form of tokens is the most interesting aspect of current developments in cryptocurrency, a point I made more than once in my MPE talk.


Following my logic then, in European regulatory terms then, the $Dimon is “e-money” and I think that is a quite reasonable definition. Case closed.

Friday thought experiment: Mac-PESA

I”m very wary of promulgating the “political correctness gone mad” meme, as it is so often a lazy reactionary knee-jerk response to changing times, but I could not resist tweeting about the news that a British police force launched an investigation after a man claimed he had been the victim of a “hate crime” when… a branch of the Post Office refused to accept his Scottish banknote. This incident has now indeed entered our official statistics as a hate crime.

Frankly, this is mental. Scottish banknotes are not legal tender, even in Scotland, as I have explained before. The Post Office is no more obliged to accept a Scottish Fiver than it is to accept Euros, gold or cowrie shells. The story did, however, cause me to reflect on what will happen when, post-Brexit, Scotland votes to leave the UK. Will Scotland then join the euro or create its own currency?

As supporters of Scottish independence insist, once Scotland becomes an independent country, it will be responsible for managing its currency in the same way that every other country that has its own currency is responsible for managing. But how should the Scots go about creating this currency? Surely messing around with notes and coins, other than for post-functional symbolic purposes, is a total waste of time and money.

A much better idea would be to go straight to the modern age and create Mac-PESA, which would be a digital money system rather like Kenya’s M-PESA with with a few crucial enhancements to take advantage of new technology. M-PESA, as a post on the Harvard Business School blog says, is “the protagonist in a tale of global prosperity to which we all can look for lessons on the impact of market-creating innovations”, going on to say that its “roots are far more humble”. They are indeed, and if you are interested in learning more about them, I wrote a detailed post about the origins of M-PESA (and Consult Hyperion’s role in the shaping of this amazing scheme) and the success factors.

The most important of these was the role of regulator: the Central Bank of Kenya (CBK) didn’t ban it. Conversely, one of the reason for the slow take-up of mobile payments (and the related slow improvement in financial inclusion) in other countries was the regulators’ insistence that banks be involved in the development and delivery of mobile payment schemes. The results were predictable. (Here’s a post from a few years ago looking at the situation in India, for example).

Anyway, back to M-PESA. It is an amazing success. But it is not perfect. In recent times it has gone down, leaving millions of customers unable to receive or send money. These failures cost the economy significant sums (billions of shillings), which not not surprising when you remember that M-PESA moves around 16 billion Kenyan shillings per day. So when it drops out, it leaves customers hanging, it leaves agents losing revenue and it leaves the banks unable to transact.

It is now vital national infrastructure, just as Mac-PESA would be.

So what if there were no system in the middle to go down any more? What if the telco, regulator and banks were to co-operate on a Enterprise Shared Ledger (ESL) solution where the nodes all have a copy of the ledger and take part in a consensus process to commit transactions to that ledger?

Do the math, as our American cousins say. Suppose there are 10,000 agents across Scotland with 100 “super agents” (network aggregators) managing 100 agents each. Suppose there are 10m customers (there are currently around 20m in Kenya, which has ten times the population of Scotland). Suppose a customer’s Mac-PESA balance and associated flags/status are 100 bytes.

So that’s 10^2 bytes * 10^6 customers, which is 10^8 bytes, or 10^5 kilobytes or 10^2 megabytes. In computer terms, this is nothing. 100Mbytes? My phone can store multiples of this, no problem.

In other other words, you could imagine a distributed Mac-PESA where every agent could store every balance. You could even imagine, thanks to the miracles of homomorphic encryption, that every agent’s node could store every customers’ balance without actually being able to read those balances. So when Alice sends Bob 10 Thistles (the currency of the independent Scotland), Alice connect to any agent node (the phone would have a random list of agents – if it can’t connect to one, it just connects to another) which then decrements her encrypted balance by 10 and increments Bob’s encrypted balance by 10, then sends the transaction off into the network so that everyone’s ledger gets updated.

You can have a 24/7 365 scheme without having a Mac-PESA system in the middle. When you make a transaction with your handset, it gets routed to a superagent who decrements your balance, increments your payee’s balance, and then transmits the new balances (all digitally-signed of course) to the other superagents.

 

It would be a bit like making an ATM network where every ATM knows the balance of every debit card. No switch or authorisation server to go down. And if an ATM goes down, so what? When it comes back up, it can resynch itself.

So please, someone challenge me on this. As a thought experiment, why not have Scotland grab a world-leading position by shifting to a Central Bank Digital Currency (CBDC) based on a shared ledger. I very much agree with the Bank of England’s view of such a thing, which is that the real innovation might come from the programmability of such a currency. This would be money with apps and an API, and I would hope that innovators across Scotland and beyond would use it create great new products and services.

Twenty Years Ago!

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

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

The Tower Thistle Hotel London March 8-9th 1999

………………Confirmed Programme…………………

Day One: Economic & Business Issues

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

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

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

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

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

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

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

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

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

Day Two: Regulatory & Technical Issues

Chair Ian Christie Deputy Director, DEMOS

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

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

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

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

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

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

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

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

Trading and hard currencies

Talking about central banks and digital / crypto / virtual (* delete where applicable) currency, I was interested to read (in the Russia Today Business News) of an initiative to create a joint digital currency for BRIC countries and the Eurasian Economic Union (EEU) that has been proposed by the Central Bank of Russia, according to its First Deputy Governor Olga Skorobogatova. She is reported as saying that “The introduction of a national digital currency seems to us not entirely justified from the point of view of macroeconomics” (presumably because as Russia is still quite cash-intensive the costs might not be justified and the benefits too concentrated). I can see why the alternative suggestion of a cross-border digital currency set up between trading partners would have much wider benefits.

This is not a new idea. As I discussed in my book “Before Babylon, Beyond Bitcoin“, some years ago the then-Chancellor John Major proposed a similar concept as an alternative to the euro which at the time was labelled the hard ECU (and ignored). The hard ECU would have circulated alongside existing national currencies. It would be used by businesses and tourists. It would never exist in physical form but still be legal tender (put to one side what that actually means) in all EU member states. Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs, tourists could have hard ECU payment cards that they could use through the Union and so on. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cheques and cards — and the cost of replacing them would have been saved.

Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs, tourists could have hard ECU payment cards that they could use through the Union and so on. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cards — and the cost of replacing them would have been saved.

(As an aside, it wasn’t John Major’s idea. It had it’s origin a few year before in a 1983 report of the European Parliament on the European Monetary System, the EMS. The proposal was supported at the time across the political and national groups in the parliament.)

The idea of an electronic currency union to facilitate international trade has new resonance. While Bitcoin captures the media attention, there are a great many other possibilities: new community currencies, brand-based plays, commodity baskets and goodness knows what else. All of these make it an exciting time to be in the electronic money business, but they also make it unpredictable, which is why it is fun. As I say in the book, we’re not looking at a world in which some kind of new global currency takes over, but a world in which a great many communities choose the currencies that are most efficient for themselves. At it happens, one of those communities could be the European Community! Noted political theorist Marine le Pen herself has said that she could see the EU setting up another currency “like the ECU”. I’m sympathetic, obviously, because the idea of restoring the Franc while simultaneously creating a new pan-European currency makes economic sense.

If anything, however, Ms. le Pen’s proposal is not really that radical. Why have nation-state control over money at all? Why not allow regions to have their own currencies? Why not use Normandy Money? Why not have pan-national currencies? Or Islamic e-Dinars? I’m on the same page as “The Futurist Magazine” here. In September 2012, as part of a compilation of pieces about life in 2100, they said that it is quite likely that we will still have money in 2100, but it may not be issued solely by nation states. I couldn’t agree more.

Madame First Deputy Governor Skorobogatova is, incidentally, far from alone in wondering about new digital currencies at this level. Christine Lagarde, head of the International Monetary Fund (IMF), gave a talk on “Central Banking and Fintech” in September last year in which she said that digital currencies (of the kind proposed by Madame Deputy First Governor) could actually become more stable than fiat currencies. She says that they could be issued against “a stable basket of currencies” ( a hard SDR?) but I would extend that suggestion to a token based on a basket of commodities (or, indeed, a mixture of both) or some other “root” with long-term stability.

It’s one thing to have crackpot technologists such as me talking about augmenting and perhaps even replacing national currencies, but when people who are actually in charge of money start speculating about the same, then you do have to suspect that some things are about to change.