Challenger banks or challenger monies?

When Jamie Dimon, the CEO of JP Morgan Chase, said that his bank should be “scared s***less” about fintech competitors, he identified the fintechs PayPal, Square, Stripe, Ant Financial and the techfins Amazon, Apple and Google as companies that the bank would need to compete with. Since he’s already forgotten more about banking than I will ever learn, I am certain that he is correct. What was interesting to me about this list was, though, that none of the organisations listed as keeping him awake at night began as banks or bank spin-offs.

As I wrote in my first ever column on Forbes, when people talked about “challengers” they should be talking about Microsoft not Monzo. The “challenger banks” are just banks and as my good friend Alessandro Hatami wrote at the time, neither the challengers nor the incumbent banks, despite spending heavily on their own technology, have transformed the financial services sector. But perhaps the real challengers will.

Where are the real challengers then? Mr. Dimon singled out payments as a specific hill for banks to die on. This is because the business models of the future depend on data, and payments are the overwhelming majority of interactions between a bank and its customers. When storming this redoubt (and the walls were breached this week with the news that ChasePay is being shut down) the techfins don’t care about the money, because the margins on payments are going down, but the data. I was quoted in The Economist talking about this impending reshaping of the retail financial services sector a couple of years ago, pointing out that financial products are heavily regulated, as they should be, which is why Big Tech is uninterested are in them. They are more than happy to have banks, for example, do this boring, expensive and risky work with all of the compliance headaches that come with it.

The techfins want the banks to do the manufacturing while they take over the distribution. This is an obvious strategy with major implications because if the techfins get between the consumers and their banks, then the banks will end up having to give away margin but, far more seriously, data. BofA Securities, amongst others, have pointed out that there is a “huge and valuable prize for private-sector players” from outside the banking sector if they can get in this business: the “treasure trove” of customer data that is not being fully exploited by the banks.


You might argue that the banks deserve nothing more than being turned into low margin plumbing to support more innovative and efficient techfin plays on top. Nydia Remolina at the Singapore Management University wrote an interesting paper on this last year (saying “financial institutions have access to enormous amounts of data, but due to multiple constraints this data is not yet sufficiently converted into useful insights”) putting forward a “data operating model” to link open banking, cloud computing, machine learning and AI to support digital transformation. I think this model is interesting because the ability for machines obtain insight and take action makes for a very different kind of fully-digital financial services sector based on the movement of data, not money.

Similarly, Dara Hizveren of Garanti BBVA, writing in the most recent Journal of Digital Banking, notes the opportunity for banks to try and build new business on such a model. The idea of “data banks” that manage personal information (and the consents associated with it) is hardly new, but as Dara highlights, the pressures of open banking and competition from Big Tech means that for commercial banks the natural extension of asset management businesses into personal data (the most valuable asset of all) is a priority.

I think we can already see how fintech firms, and particularly data-driven lenders, are demonstrating that this new business model, using payment data (in the form of transaction histories obtained through open banking) as a substitute for conventional credit scores, might be important not only to the sector but to economic recovery itself.

The UK actually looks pretty good in this regard. With a competitive fintech sector and open banking already in place, access to the transaction data has become energy for innovation. I know this at first hand because I was fortunate to be asked to be one of the judges for the Open Banking Innovation Awards for SMEs and I have to say I was pretty impressed by the businesses already taking advantage of this combination of new regulation and new technology. A couple of good examples are Fluidly, which plugs into accounting packages and bank accounts and uses machine learning to intelligently manage SME cashflow, and Swoop which integrates through open banking to simplify access to all kinds of SME finance. More recently Liberis, which provides cash advances to SMEs secure against their payment card transactions and repayments set as an agreed fraction of those transactions struck me as a good idea or all involved, and as I sat down to write these paragraphs I noted that another new player Fintern (with a team from Bank of America and HSBC, among others) opening for business using open banking-led affordability testing to make lending decisions.


These are great businesses, but are they keeping Jamie tossing and turning in the small hours? I’m not sure. If they get big enough, he can buy them. We need to look further afield to find the non-banks that are his real nightmares and I think India might give us an indication of which way the wind is blowing. Ram Rastogi, who I always listen to on such matters, notes that Amazon in India is not only launching a digital banking platform to compete with the incumbent banks but is also applying for a licence to run a payments system as well. The Reserve Bank of India has invited companies to create new umbrella entities (NUEs) to build payments networks that offer an alternative to the bank-owned not-for-profit National Payments Council of India (NPCI) and Amazon are doing so in a consortium with Axis Bank and ICICI Bank. Amazon are not the only ones in this game, of course. Facebook and Google are linking with local players Infibeam and Reliance Industries to set up a competing network.

Bezos buck

with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

With the bank and the payment network, Amazon will be able offer their sellers a full service, ranging from current accounts and deposits to business loans and payments management, all through their own interface. The customers will never have to go near a conventional bank, a payments application or anything else. Not only are they launching their own banking system in India, they are apparently looking to launch their own money in Mexico. One of the behemoth’s job postings described the product as enabling customers to “convert their cash in to digital currency using which customers can enjoy online services including shopping for goods and/or services like Prime Video”.

It’s one thing to have your own bank. It’s another thing to have your own payment network. It’s another thing still to have your own money. I know nothing about running a bank, but if I was in charge of one then the thing to keep me awake at night is Jeff Bezos’ face on money!

(An edited version of this article first appeared in Forbes, 16th March 2021.)

Objects-as-a-Service (OaaS) and why things need identities

Ann Cairns, Executive Vice Chair at MasterCard, said back in 2018 that it could be the year when (thanks to the incredible speed with which new technologies are adopted) physical wallets could soon be a thing of the past as the world wakes up to wearables. Ann said, correctly, that wearable devices are getting a “new lease of life by becoming payment enabled” and noted forecasts predicting that two-thirds of wearables would have payment functionality by 2020. This didn’t quite happen, for reasons I will return to shortly, but as a baseline note her point that five years ago the global sales of smart wearables were already at $416 billion.

In 2019, Mastercard highlighted that wearables are about fashion as well as function. They pointed out that as the technology that powers wearables gets smarter, fashion brands rather than technologists (or payments geeks) are driving the evolution of the market. Even then, one in five adults in the USA were already wearing a smart watch or fitness strap and they expected the wearable tech market to reach something like $30 billion in 2020.

Wearables Market 2020

Global wearables markets 2020 (Source: IDG, 12/20).

In 2020, as these figures from IDG show, the wearables market (dominated by Apple) continued to grow and is expected to maintain a double-digit rate of growth through 2024. In the US, the wearable device most frequently used for payments is the smartwatch (more than mobile phones or contactless cards). Interestingly, recent research shows that college graduates are more frequent users of smart watches for payments than non-college graduates and that they use their wearables to pay more than 200 times a year, almost double the usage of mobile phones and 50% more than cards.

The market for wearables that can do interesting things (eg, payments) is going to grow more than that though, because the growth of cheap passive wearables (ie, wearables that don’t need batteries, just as contactless cards don’t need batteries) will grow faster because of the new, smaller and more cost-effective chips arriving from suppliers such as Infineon. I wasn’t surprised, therefore, to see an excellent presentation from Discover at the Women in Payments 2021 summit saying that…

Discover Wearables

So what has prevented this market from developing even faster? Well, the process of taking an “empty” microchip and loading secure credentials into it so that it can be used for payments, identity, provenance and other high value applications (the process of what card people call “personalisation”) is complex and costly. Imagine that you are running a pop festival and you want to provide rings or wristbands or badges or whatever than can be used to gain entry, to pay for drinks, to identify someone in an emergency. Taking 20,000 wristbands and loading credentials into them and then making sure each wristband gets to the right person is a logistical challenge hence the technology tends to be applied at the high end of the market. There are companies that make some beautiful wearables that can be used in this way. I love the stuff that Tovi Sorga has and I think this illustrates that Mastercard point about the role of fashion. Amex, to give another example, have just released a Prada leather bracelet with a contactless chip in it for their Centurion cardholders.

Getting the right bracelet with the right payment card into the hand of the right cardholder is complicated though. The logistics are a challenge because the devices must be “personalised” when they are ordered and then correct distributed. As a way of reducing the logistics costs, though, suppose there was a decentralised way to do the personalisation needed to turn nice wearables into secure, smart objects? Imagine that the pop festival organiser sends you a wristband and then you use your own mobile phone to load one of your payment cards into the wristband? Or you use the (eg) Discover app on your phone to create a prepaid card valid for a week and load $100 onto so that you can leave your phone in your pocket while you enjoy the show? Well, this is what Digiseq, a UK start up has done. And this is only one of the reasons why I was flattered to be asked to become their Non-Executive Chair as they go into their next fund-raising round. Amongst their achievements already is the launch of KBC wearables in Belgium, including the Rosan Diamond key fobs that proved popular last year, creating a Lucozade bottle that you could use to pay for travel in London and putting chips into the Golden Globe awards so that their authenticity and provenance could be validated.

Provenance is Forever

Provenance is important. I wrote about it more than a decade ago using the example of luxury goods such as watches and asking how you would tell a fake Rolex from a real one. It’s a much more complicated problem than it seems at first. Suppose an RFID chip is used to implement an ID in luxury goods, authentic parts, original art and so on. If I see a Gucci handbag on sale in a shop, I will be able to wave my phone over it and obtain the ID.  My mobile phone can decode the number and then tell me that the handbag is Gucci product 999, serial number 888. This information is, by itself, of little use to me. I could go onto the Gucci-lovers website and find out that product 999 is a particular kind of handbag, but nothing more: I may know that the tag is ‘valid’, but that doesn’t tell me much about the bag. For all I know, a bunch of tags might have been taken off real products and attached to fake products.

To know if something is real or not, I need more data. If I wanted to know if the handbag were real or fake, then I would need to obtain its provenance as well as its product details. The provenance might be distributed quite widely. The retailer’s database would know from which distributor the bag came; the distributor’s database would know from which factory the bag came and Gucci’s database should know all of this. I would need access to these data to get the data I would need to decide whether the bag is real or fake.

The key to the business model is not the product itself but the provenance, so delivering a service means linking the personalisation and the provenance under the control of the brands. This is where Digiseq is going. In January, one of the world’s leading chip manufacturers Infineon Technologies AG announced that they will be working Digiseq on their  SECORA™ Blockchain NFC technology to deliver secured identity data. This is an advanced solution that connects the digital data recorded on blockchain to physical items, allowing for just this comprehensive verification of the identity of items, thereby eliminating the challenge of product substitution and heightening supply chain transparency.

cheap chips can turn almost anything into a smart object and with the right provenance service in place turn those smart objects into objects-as-a-service (OaaS). Click To Tweet

The ability for brands to choose whether to give customers high end wearables for select markets or to push into the mass market with wearables that customers can personalise themselves, using the mobile phones to add/remove payment cards, access codes or identities at any time, is a game changer. But it is only the beginning. The secure microchips that are inside the Prada bracelet or the Golden Globes can be inside everything from smart watches to luxury handbags, from aircraft parts to bottles of whiskey. These inexpensive RFID chips turn almost anything into a smart object, and with the appropriate back-end provenance system in place, they can turn those smart objects into objects-as-a-service (OaaS).

Objects-as-a-Service are going to be… well, huge. If you want to learn a little more about this incredible new market and the opportunities that it presents, come and join me at the Digiseq webinar on 22nd April 2021 at 9am UK time. Sign up here.

Monet laundering and a new kind of market

You’ve probably read something about the latest crypto-craze. My good friend Lawrence Wintermeyer wrote a great piece about it here, describing how an anonymous guild of “art digitalists” bought an original Bansky and then set fire to it after digitizing the piece into a non-fungible token (NFT) they sold for $400,000.

NFTs really hit the headlines when the artist Mike Winkelmann (“Beeple”) sold an NFT of a JPEG he had created for $69m at Christies. It’s a lot to pay for nothing since, as my good friend David Gerard eloquently notes, Christie’s 33 page conditions of sale make it clear that the buyer did not obtain copyright or indeed any other rights to the file. The $69m is for nothing more than an albeit uncloneable receipt for the artwork. Not that the buyer minded, because he runs a crypto fund that invests in NFTs and issues tokens that are shares in the portfolio. Beeple owned 2% of these tokens, which went up in value from $0.36 per token to $23 after the Christie’s sale. Nice.

Now, you may think (as I did) that this is more interesting as a piece of performance art about the manipulation of cryptomarkets than a window into a new world that decentralises auction houses out of existence, but it is undeniably interesting. That’s because, trivially-copyable artworks to one side, NFTs could deliver radically more efficient markets.


with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

To see why, let’s first remind ourselves of what tokens are. Tokens are a cryptographically-secured digital asset (that is, they cannot be counterfeited or duplicated). As I explained in my book Before Babylon, Beyond Bitcoin a few years ago, although tokens are not specific to Ethereum they took off with the development of the ERC-20 standard back in 2015. ERC-20 defined a way to create a standard form of token using consensus applications on the Ethereum blockchain. Such tokens are a simply structured data exchanged between these applications, a practical implementation of digital bearer claims on assets with no clearing or settlement involved in their exchange (and hence a more efficient marketplace for their trading), thus creating a means to make the transfer of fungible value secure without a central authority.

I have written before that fungibility is a critical defining characteristic of money and one of the reasons why Bitcoin isn’t. All of the dollars in the world are the same, and any dollar can substitute for any other dollar. But all of the Bitcoins in the world are not the same. Similarly, my excellent stalls ticket to see the mighty Hawkwind play at the London Palladium on 1st May is unique. So… how do you know that that ticket belongs to me? Right now there are event promoters, and ticketing agencies and credit card acquirers and databases and barcodes to try to figure that out. However, if I am a bad boy and sell a ticket that is nothing more than an e-mailed barcode to two other people and they both show up to watch a band, neither the venue nor the band nor other fans nor anyone else can tell which barcode is authentic and which is a copy.  But what if the ticket isn’t a barcode, but a non-fungible digital asset stored in my digital wallet? An NFT?

Now, non-fungible digital assets are fun and markets for them existed before Bitcoin, the blockchain and Enterprise Shared Ledgers (ESLs). Consider the obvious example of people playing massively-multiplayer games (MMGs) such as World of Warcraft and the like. People buy sell digital assets all the time (one of the first blog posts that I ever wrote was about the mining of digital gold in these games, and that was back in 2006!). If I want a magic sword or a laser cannon or a nicer hat for my avatar, I can buy it with real money. If you could copy magic swords to infinity, then they would have no value. So the number of magic swords is limited, and thus a market arises. So who says who the magic sword belongs to? If I pay you some real dollars for a non-existent virtual sword, who transfers title? Well, in the case of the games, it is obvious: it’s Blizzard or CCP Games or whoever else is in the middle, running the game.

New technology means that I can sell you the magic sword without having anyone in the middle. On Ethereum, for example, there are now a number of different ERC token standards, most notably ERC-721 that defines non-fungible digital assets. ERC-721 hit the headlines (well, for people like me anyway) back in 2017 when CryptoKitties took off. This is game on Ethereum that allows players to purchase, collect, breed and sell virtual cats and it became so popular that caused such congestion on the Ethereum network that is slowed in down significantly. The point is though that we can now exchange unique digital assets in a fully decentralised manner.

I remain unconvinced that buying digital receipts for trivially-cloneable artworks is a sound long-term investment strategy, although I am given to understand that much of the art market is more about money-laundering than Monet (Monet laundering! Why didn’t I think of this headline before!). However, that is not to say that there is no future for NFTs. On the contrary, some of these art market experiments are breaking ground for a new way of working that I think will indeed transform some markets.

Real Connections

These digital assets will very often be a means to control of things in the real world without having anyone in the middle either. Some years ago I asked if shared ledgers and such like might be a way to tackle the issue of “ID for the Internet of Things” (#IDIoT). I said at the time that I had a suspicion that there might be something there. My reason for thinking that was that there is a relationship between digital assets and things, because blockchains and tokens deliver a virtual representations of things in the mundane that, as with their physical counterparts, cannot be duplicated. If we can link the digital asset of a Rolex watch to a physical Rolex watch, we can do some very interesting things.

(As it happens, I am the non-executive Chairman of Digiseq, a UK startup that does this using tamper-resistant microchips).

What all of this means is that we can use the new technologies of cryptoasset trading (the world of decentralised finance, or “defi”) to develop efficient markets in scarce resources, markets that will hinge on the ability to maintain and prove the provenance of real-world objects, whether these are magic swords or designer handbags.

The opportunities for new and disruptive businesses here are real and substantial. Here’s an example, continuing the music theme. A band is going to play a concert. There are 10,000 seats in the venue and 100,000 members of their fan club. So the band randomly distribute the tickets to the members of the fan club who pay $50 each for them (this is all managed through smart contracts). And that’s it. Now, the members of the fan club can decide whether to go to the concert, whether to buy some more tickets for friends, whether to give their ticket to charity or whatever. They can put their tickets onto eBay and the market will clear itself. The tickets cannot be counterfeited or copied for the same reason that a Bitcoin cannot be counterfeited or copies: each of these cryptographic assets belongs to only one cryptographic key (“wallet”) at one time, and whoever has control of that key has control of the ticket.

Not your keys, not your Kings of Leon, as the kids might say.

(An edited version of this piece was first posted on Forbes, 7th March 2021.)

Bitcoins stay dirty, no matter how much you launder them

Some people mine Bitcoin for profits but some some people mine it for politics. The operator of a Bitcoin mining pool (a group of miners who work together to share the profits) quoted in CoinDesk recently says that some are investing not to convert electricity into cash but for other reasons “such as to avoid capital controls or avoid sanctions”. Indeed. And this has some serious implications. The Foundation for Defense of Democracies (FDD), a Washington think tank, summarised the emerging situation rather well in their position paper “Crypto Rogues“. They noted 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 and, indeed, the Swiss central bank has just published a working paper describing how to do so) it again flags up that the widespread availability of decentralised financial services threatens to bypass the existing infrastructure.

Iran provides an obvious example. They have every incentive to want to try new approaches to skirt the long arm of American law. The country already published a new set of regulations designed to funnel Bitcoin mined by Iranians to the state so that the country can use them to pay for imports. 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 America’s Treasury Secretary Mnuchin said at the time (talking about Iran), “If you want to participate in the dollar system you abide by US sanctions”.

On the other side of the world, North Korea has been 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. The regime sees this as a way to enforce deals it makes with foreign counterparties 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).

Across the Pacific in Venezuela, a country often mentioned by Bitcoin enthusiasts as a living case study of the benefits of decentralised cryptocurrency in the fight against tyranny, we find more mining going on: a video posted on Instagram by the 61st Battalion of the 6th Corps of Engineers of the Venezuelan Army shows military buildings converted into giant cryptocurrency mining centres and a warehouse that appears to be full of specialist Bitcoin mining equipment is labelled the “Center for the Production of Digital Assets”.

(I noted with interest that they do not appear to be mining “The Petro”, the digital currency of the revolution which according to the Bolivarian Council of Mayors’ recent “National Tax Harmonization Agreement” may soon be required for the payment of taxes.)

What… Whatible?

It seems to me that Bitcoin is a pretty poor choice for sanction-busting shenanigans though. Not only is the record of transactions public, but the Bitcoin value is not fungible. This matters. Remember that 2014 IRS Ruling about Bitcoins being a commodity, so that traders would have to track the buying and selling price of each individual Bitcoin in order to assess their tax liability? No? Here’s a reminder : “the real lesson from the IRS Bitcoin ruling is that for a currency-or any payment system-to work, its units must be completely fungible”.

Fungible (from the Latin “to enjoy” via Medieval Latin phrases such as “fungi vice”, meaning “to take the place of”) is one of my favourite adjectives. It means that all tokens are the same and can be substituted one for another. You owe me a quarter. It doesn’t matter _which_ quarter that you give me. Any will do. Any quarter can substitute for any other quarter because they are all the same. The same is true of the Pounds in my bank account, but it isn’t true of bitcoins. They are all different and their history can be tracked through the blockchain which is, as we are often reminded, and immutable public record of all transactions. 

The lack of fungibility has major implications for criminals, but also for the rest of us. As my good friend Marc Hochstein observed about this some time ago, blockchain’s openness could turn out to be a bug for law-abiding citizens. In England, the High Court (in the decision of AA v Persons Unknown & Ors, Re Bitcoin [2019]) has already ruled that crypto assets such as bitcoins are a form of property capable of being the subject of injunction. You can see what is going to happen: cryptographic exchanges will be required to identity who owns stolen coins and the owner will then be the subject of legal action to recover them. This owner might be entirely innocent about the origin of the coins and will say that they didn’t know that the bitcoins they bought are the proceeds of a ransonware attack and may ask to the keep them. But, J.P. Koning points out, that’s not how property law works. Even if you accidentally come into possession of stolen property then a judge can still force you to give it back to the rightful owner.


with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

The UK has been experimenting with the “Unexplained Wealth Order” as a way to combat crime and corruption through the traditional money and finance system, but how would this translate to the world of cryptocurrency? Well, perhaps it doesn’t need to. In the world of Bitcoin, smart criminals may well try to use “mixers” or “tumblrs” that jumble together bitcoins to obfuscate their origin but I don’t think this will help in the long run. Apart from anything else, future consumers might want to know the provenance of their money, an idea explored by the artist Nitipak Samsen a decade ago in the Future of Money Design Awards. Check out the brilliant video he made here.

Have you ever wondered where the money in your pocket had come from? Who was the previous owner? Who was the owner before that? Might it be a famous celebrity?… Smart banknotes work by presenting a readable history of ownership on the note itself, an innovation designed to prevent money laundering

This might work in some interesting ways. People might pay a premium for coins that have an interesting past! Maybe coins that were used by a celebrity to buy drugs or were used to bribe a politician, coins that belonged to a murderer, that kind of thing, might be worth more than coins that belonged to boring people like me.

Clean Money

In the mundane world of dollar, dollar bills we have the concept of “money laundering” to describe what happens when dirty money is mixed with clean money (surely every one of us has touched banknotes that have been involved in some criminal activity!). But this doesn’t work for bitcoins. The “tainted” money stays tainted. Ross Anderson, Ilia Shumailov and Mansoor Ahmed from the Cambridge University Computer Laboratory wrote a terrific paper on this theme a couple of years ago. In “Making Bitcoin Legal” they pose some interesting questions about what to do with tainted cryptocurrency asking, for example, “If an identified customer says ‘Hi, what will you give me for UTXO x?’ and the exchange replies, ‘Sorry, 22% of that was stolen in a robbery last Tuesday, so we’ll only give you 78%’ does the customer then have to turn over the crime proceeds?”. Their idea of a public “taintchain” is an interesting way forward.  This would be a mechanism to make stolen coins visible, in which case they might display a futuristic Gresham’s Law dynamic as good coins drive out bad ones!

Whether by taintchain or some other mechanism, it’s actually pretty each to track dirty bitcoins. You can see where this might lead: if law enforcement agencies go to the biggest miners in the world and tell them that if they continue to confirm easily identifiable mixing transaction outputs, they will be accused of money laundering? This is not difficult to imagine, which suggests to me that Bitcoin’s lack of fungibility has far-reaching implications.

These implications have not gone unnoticed in the United States. Two of the largest Bitcoin mining companies there, Marathon Patent Inc. and DMG Blockchain Solutions Inc. (which together account for about a one-twelfth the power of the Bitcoin networks), recently joined forces to create the Digital Currency Miners of North America (DCMNA). This not-for-profit trade association has come up with pretty interesting idea: their miners will only process transactions that comply with American laws, thus extending the benevolent embrace of the U.S. Government into cryptocurrency. The idea (known as “clean mining“) is that instead of selecting transactions on the basis of which ones will bring the biggest fees, they will mine transactions based on the wallets that they come from.

We could well see a strange and interesting twist in the world of cryptocurrency that has no analog in the analogue world of notes and coins: black and white money, or clean and dirty money, or light and dark money (an idea that goes back to the earliest days of cryptocurrency) in which some bitcoins will be worth more than others! Maybe a year or two from now, exchanges will be quoted two BTC-USD pairs: clean BTC at $100,000 and dirty BTC at $75,000. This doesn’t happen for GBP-USD or JPY-GBP, which confirms my feeling that whatever Bitcoin is, it isn’t currency.

[An edited version of this article first appeared on Forbes, 28th February 2021.]

Right now we need embedded health as much as embedded finance

Embedded finance is great and I love having apps on my phone that take care of the interface to the tedious world of banks and money so that I don’t have to deal with them. But embedded finance doesn’t get me out of the house. And it can’t get me in to watch Manchester City again. It can’t get me on a plane to Singapore. Perhaps to get the post-COVID economy moving again, embedded health APIs will be more important than embedded finance APIs!

What’s the point of having all sorts of clever instant credit, credit transfer and buy on credit mechanisms that I can use to buy a new shirt if I am not allowed to go to meetings? Why bother with fancy QR code contact-free dining experiences if I am not allowed into a restaurant? How do I benefit from sophisticated electronic tickets dropped directly into my phone when there is nowhere to go on the train? What is needed to ease the economy back on track in the recurring pandemic, new normal world is the ability to show a vaccination record as well as a plane ticket and a negative test result along with a restaurant booking.

In fact, so pressing is this need that I might go so far as to predict that the virus shock may well mean a quantum leap in strategy in the world of digital identity: what if it is not finance or government, as most of us had assumed, but travel and hospitality that drives digital identity into the mass market?


with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

It is actually pretty easy to imagine the customer journey with embedded health. I go online to buy ticket to see Hawkwind in concert at the London Palladium in May but in order to check out I must first present a certificate to show that I have been vaccinated against COVID-19 (I’m afraid that the Hawkwind fan demographic renders this necessary) and a certificate to show that I have been vaccinated against Yellow Fever or whatever else the London Palladium demands from would-be patrons. I present the digital certificates and go about my day.

That is quite easy to draw as some boxes and arrows mapping out a customer experience journey on a whiteboard, but what has to happen to make it a reality? That’s where things become a little more complex.

Vaccine Passports

There are some well understood issues around identification and authentication but to my mind these are largely solved. There are plenty of companies that can do digital onboarding pretty efficiently (indeed, I am an advisor to the board of one of them, Au10tix) and there are plenty of companies that can do authentication: If I could have used “sign in with Apple at the London Palladium”, I undoubtedly would have. What’s missing, and where there has to be some progress to bring that smooth customer experience into being, is the standardisation of the creation, presentation and verification of the health-related data.

(Just to divert for a moment to be specific about language: I use claim to mean the process of presenting a credential to be verified and I use credential to mean some attribute that has been attested to by somebody that the verifier can trust. By trust, of course, I mean “can sue for large amounts of money if the data turns out to be incorrect”.)

If a theatre, or more likely a theatre’s merchant services processor (MSP), wants me to show that I have been vaccinated then both the claim process and the claim data have to be in some sort of standard format. Otherwise we will end up in bubbles and make no real progress. It is clear that something has to be done. Ursula von der Leyen, the president of European Commission, recently said that a “Digital Green Pass” would provide proof of inoculation, test results of those not inoculate and antibody status of those who had had the disease. This is inevitable, frankly, in one form or another. But how exactly would it work?

There are some great companies out there who are already working hard to make the transport and display of results as easy as possible.Yoti, for example, have been involved in a number of trials using FRANKD. This is a rapid Point of Care Covid-19 RT-LAMP. People scan a unique QR code on their FRANKD test bag to add their identity to the test. After a testing swab is taken, results are processed and delivered straight to the individuals’ Yoti app within 30 minutes. To scale up, though, we need standards that identity providers can use to interoperate with service providers of all kinds. This is why the foundation of the Vaccination Credential Initiative (VCI) is so important.

VCI is a coalition of public and private partners including Microsoft, Salesforce, Oracle, The Commons Project Foundation, Mayo Clinic and many others working to enable digital access to vaccination records using the open, interoperable SMART Health Cards specification, based on the W3C Verifiable Credential (VC) and HL7 FHIR standards. FHIR stands for Fast Healthcare Interoperability Resources, a standards framework created by Health Level Seven International (HL7) , a not-for-profit, ANSI-accredited organisation developing standards for the exchange, integration, sharing and retrieval of electronic health information. The idea, essentially, is to group a set of FHIR content resources (eg, immunisation or observation) for presentation in the form of a verifiable credential.

The New York Times showed a mock-up (from The Commons Project) of what a digital vaccine credential might look like in practice, using a pretty straightforward QR code interface that passengers are already familiar with for check in.


Waiting for a globally-interoperable set of standards won’t help to boost the economy today, so it seems to me that it makes sense to link sector-specific identities together with sector-specific credentials that can be later bridged at the back-end. The obvious place to start implementing something like the EU’s Digital Green Pass is in the travel sector and the obvious people to co-ordinate this are the International Air Transport Association (IATA) and, indeed, the COVID-driven need for a such credentials has led IATA and British Airways’ parent company, International Airlines Group (IAG), to starting work together in this direction.

I hope they chose to use open standards for their Travel Pass Initiative (TPI). TPI brings together four interoperable “modules” that combine to deliver a practical solution to get people moving again. These modules are:

  • A up-to-date list of requirements for travel (ie, what vaccines or tests are necessary for travel on specific routes) so that travellers know what they need to do to travel;
  • A registry of health centres that can carry out vaccinations and tests that travellers need;
  • A contactless travel app for travellers so that they can find out what the travel requirements are, where they can get the tests and vaccines and store the results;
  • An application for labs to report results.

Singapore Airlines has been the first carrier to adopt the new standard and begin verification based on the IATA TPI framework. Passengers who receive a negative test or vaccine will be given either a digital or paper QR code to take to the airport. Emirates will implement the first phase in Dubai in April and will use the app for the validation of COVID-19 PCR tests before departure. Using the app, which will automagically post details to the check in system, passengers travelling from Dubai will be able to share their test status directly with the airline before reaching the airport. 

So if this works for getting on planes… why not use the same registries and APIs to power applications for restaurants and pubs to get the economy moving again? I’d be more than happy to be required to show my test status to get into the Etihad to watch the mighty Manchester City via a Travel Pass app, or my British Airways app, or my Man City app or whatever other convenient application was accessing standardised VCI vaccination and test records through the IATA API. And if IATA and VCI together create a global standardised platform then the opportunity for fintechs to exploit the combination of embedded health and embedded finance together in apps will be enormous.

(An edited version of this piece appeared on Forbes, 25th January 2021.)

Tulips, steam and decentralised finance

When we are thinking about where the worlds of Bitcoin and cryptocurrencies, “smart” “contracts” and decentralised finance (defi) will go, it can be helpful to find historical analogies that can provide a shared narrative to facilitate communications between stakeholders and provide foundations for strategic planning. But it’s important to find the right analogies and, even more importantly, to derive the right lessons from them.

For example: people discussing Bitcoin will often refer to the famous “tulip bubble” in 17th century Holland. But if you study this episode, what you discover is not a mass market mania but speculation by a small group of rich people who could well afford to lose money. And you will also see the creation of a regulated futures market that played a role in the financial revolution that contributed to a Dutch golden age which meant that balances at the Bank of Amsterdam became a pan-European currency and, as noted in an interesting paper from the Atlanta Fed last year, the florin (the unit of account for those balances) played a role “not unlike that of the U.S. dollar today”.


with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

As I am very interested in learning from a) history and b) smart people, I set up a room to discuss the topic on Clubhouse. (I have to say this transformed my view of Clubhouse, because I was blown away by the quality of the discussion that ensued and how much I learned in such a short time. Truly, arguing with smart people is by far and away the fastest way to acquire actual knowledge!)

Cryptocurrencies are more like railway shares in Victorian Britain than tulips in the Dutch Golden Age. Click To Tweet

Aside from tulips, another well-known “bubble”, Britain’s 19th century railway mania, was the subject of some discussion in the room. This particular example is worth studying because I agree with Nouriel Roubini and Preston Byrne’s observation that that the cryptocurrency mania of today “is not unlike the railway mania at the dawn of the industrial revolution in the mid-19th century”. If you want to read more about this, I wrote a detailed article about it a couple of years ago and, in fact, noted the incredible scale of the mania in Financial World magazine a decade back: The first railway service in the world started running between Liverpool and Manchester in 1830 and less than twenty years later the London & North Western railway had become the Apple of its day, the biggest company in the world. This boom in turn led to a colossal crash in 1866, which then led to a revolution in accounting and auditing.

My good friend Maya Zahavi drew the parallel between railway mania driving the introduction of accounting standards that led to new global capital markets in Victorian times (which in turn led to new kinds of regulation and institutions) and that world of defi: The world of financial services, including lending, exchanges, investment and more that are built on shared ledgers and smart contracts. I think she is right. I have long held the view that while cryptocurrencies themselves may or may not have a future as money, the evolution of digital assets that are secured by the underlying networks (“tokens”) points towards new services, markets and institutions that may well lead to a better financial sector.

This view, that digital assets (“tokens”) are where the next generation of financial services will be forged, was reinforced in a new paper published in the Federal Reserve Bank of St. Louis Review. In it, Fabian Shar explores the evolution of markets based on tokens that sit on blockchains of one form or another. He looks at three models for “promise-based” tokens: off-chain collateral, on-chain collateral, and no collateral.

  • Off-chain collateral means that the underlying assets are stored with an escrow service, for example, a commercial bank. There are already several examples of off-chain collateralised stablecoins. The most popular ones are USDT and USDC which both USD-backed* ERC-20 tokens on the Ethereum blockchain.
  • On-chain collateral means that the assets are locked on the blockchain (in a smart contract).
  • Algorithmic tokens that are not backed by collateral at all, but whose value is maintained by algorithmic market interaction. This was, incidentally,  the original meaning of the word “stablecoins” that has now been hijacked by imprecision)

The trading of these tokens, if it were to take place in the existing market infrastructures, would be interesting enough. But to Maya’s point, this is not where we are going. We are heading into the defi era where there is an impending explosion of business models, institutional arrangements and transaction complexity which, when it settles, will leave us in a new financial world. I strongly agree with the view of Jay Clayton (when chairman of the U.S. Securities and Exchange Commission) that “everything will be tokenised” and the obvious corollary to this that everything will be decentralised. It is not the underlying cryptocurrencies that will be the money of the future but the that they support. As the St. Louis Fed’s paper concludes, and as I wrote in Forbes back in January, defi may potentially contribute to a more robust and transparent financial infrastructure.

In the long run (and the lessons from history are clear), I think this will be much more important and lead to much greater structural change (and therefore opportunities) than cryptocurrencies. We can already see the world of tokens entering the mainstream: Dapper Labs (the company behind the famous token game CryptoKitties) is as I write raising $250 million at a $2 billion valuation and Celo, a defi alternative to Facebook’s Diem, has just raised $20 million from (amongst others) noted Silicon Valley investors Andreessen Horowitz.

There are good reasons to welcome these pointers to the emerging paradigm. While defi is now mainly used for speculation between tokens of many varieties, in the longer term it offers the promise of much reduced costs in financial intermediation by both removing middlemen and automating them, it opens up the possibilities for new financial instruments better suited to the new economy (instruments built for bots to trade, not for people to understand). It also, and most importantly (for reasons discussed before), offers a more transparent market with accountability as part of the infrastructure. Don’t be put off by the Wild West of defi as it stands now, begin your scenario planning for defi as it will (inevitably) become.

*Does not constitute financial advice.

[An edited version of this article was first posted at Forbes, 15th February 2021.]


As I recall, some of the delegates at the 2016 cryptocurrency conference Consensus were sceptical when I shared my preferred strategy for securing my digital dosh, which was to convert the security key into a QR code and have it tattooed onto my scrotum. You could see them wondering about my grasp of the relevant risk models and questioning my confidence in the technology. I was not dismayed by their negative reaction. In fact, I had suggested this approach to managing privates keys (sic) before and had even toyed with the idea of patenting this breakthrough in cyber defence, on the grounds that you can patent anything no matter how trivial and obvious there days, but sadly I never got round to it. Now I am kicking myself about it, because I was delighted to read in the New York Times that numerous people of an innovative bent have indeed had QR code tattoos and… guess what, they work.

Www dgwbirch code

Everyone uses QR codes now. They are on advertisements, face masks, business cards and Zoom backgrounds. There are two reasons for this: COVID-19 and Apple. A couple of years ago, Apple changed the iPhone software so that you could scan QR codes with your iPhone camera and not have to run a separate app. At a stroke, gazillions of people gained the ability to automagically engage in contact-free transactions, while shortly afterwards along came the pandemic and the demand for contact-free transactions for everything, not only shopping, went into overdrive.

Everyone uses QR codes now. There are two reasons for this: COVID-19 and Apple. Click To Tweet

(It’s not all down to Apple, of course. The cameras in mobile phones have improved across the board so that QR codes can be scanned clearly from a safe distance so that consumers can stand a couple of metres away from the point of sale and buy without using cash. )

Supermarket codewith kind permission of TheOfficeMuse (CC-BY-ND 4.0)

Just look around and see how quickly the technology has accelerated in coffee shops and cafes, pubs and clubs, fast food and just about everywhere else. At the cafe near me, the transformation was overnight. Now you sit down, scan a QR code and order on your phone, then a server brings you your food and drink. And when you’ve finished, you just get up and walk out. And that last point, the ability to pay and go instead of waiting for and then paying a bill, is a delight for customers and premises alike. One US technology provider has measured that this saves saves 21 minutes of table time on average and, as they note, that’s great for a restaurant “because they have the ability to increase their revenue per hour per seat” as well as removing the need to touch devices and keypads (which is why so much of the restaurant industry’s investments in in-store tech has gone toward contactless payment solutions through QR codes).

At the Women in Payments Symposium this month, Rebecca Speck from Discover gave a very good presentation on the dynamics in contactless payments. She showed figures for Quick Service Restaurants (QSR) in the USA, where half of all payments are already contact-free, that gave a pretty even split between cards, apps and xPays. My guess is that in time the restaurant chains will continue to incentivise customers into their apps and we will see the use of both chip and PIN and contactless cards fall, fulfilling the prediction that Anthony Jenkins made (when he was head of Barclaycard, before he was the CEO of Barclays) when he said, as memory serves, that mobile phones would get rid of cards long before they get rid of cash.

Check In

I’ve been very interested to see the emerging dynamics at retail point of sale (POS) across sectors. A few years ago, I was of the general opinion that QR code for payments would fade away because tapping with cards or phones was quicker and more secure. But one retailer after another began to start using QR instead of NFC, partly because they didn’t want consumers to have to understand how to turn on and use NFC in smartphones and partly because Apple wouldn’t let them access payment interfaces in iPhones anyway. When the biggest retailers decided to go QR instead of contactless, you could see which way the wind was blowing. Walmart, to take the obvious example, introduced QR into Walmart Pay. Instead of selecting Walmart Pay at checkout, customers can now scan a QR code and Walmart Pay is connected so that customers can pay contact-free.

In strategic terms, my strawman assumption going back five years was that retailers were going to get rid of payments at POS and shift to payments inside their own apps, apps that they use to deliver better customer services. Or, in the bumper-sticker version, “we’re going from check-out to check-in”. This is where the supermarket chains went in the UK, where Tesco became “the latest grocer to develop its own technology to bypass the costly Android and Apple systems” and Sainsbury’s was trialling its SmartShop app which allows users to create their own shopping lists, navigate stores and make payments at dedicated kiosks. In the UK, Tesco has just announced that their mobile payment app Pay+ has now taken its first billion in payments.

As with other retailers, one of the attractions for supermarket chains is that their app can combine payments, loyalty and spend tracking in one and a simple quick QR scan is all that is needed to get everything done. I’m sure this combination (and, if I remember correctly, prescriptions) is what attracts consumers to using the CVS app, where shoppers will be able to scan a QR code on their phones to pay using stored debit or credit cards, bank accounts, PayPal balance, PayPal Credit, Venmo balance or Venmo Rewards. This focus on apps at POS was an obvious strategic focus long before Tim Cook stood up on stage to explains “the benefits of Apple Pay in apps“.

So customers will end up with hundreds of apps on their phones? I do not think so. I remember a Comscore survey that found thatover half of American consumers would be happy to have four or more retailer apps on their phone and I remember something I looked at for a UK client a around that same time. From memory, the overwhelming majority of household disposable income in the UK goes to a handful retailers per household. Put these approximations together and consumers will not have hundreds of apps on their phones to deal with every retailer. For the retailers they visit frequently (e.g., Starbucks) they will have the retailer app and use it. In other cases they will just use some third-party payment app (e.g., their bank) or a convenient wearable like a bracelet or key fob that is controlled by a third-party app. This will give retailers new opportunities to add value and new control over identity and payments.

(An edited version of this piece appeared on Forbes, 5th February 2021.)

The Transparency Machine

Most blockchain ideas that I hear about make no sense. In general, they do not involve blockchains (just some sort of shared database) and where they do actually involve blockchains they are used to emulate shared databases to deliver a slower and more expensive service. How is it then that even a blockchain grouch such as me thinks that the technology has something to offer?

Well, first of all, let’s stop talking about blockchains and use the more general terms shared ledgers to cover the spectrum of relevant technologies and enterprise shared ledgers to cover the particular use case of sharing data between organisations (and regulators etc) in a permissioned manner. I think that the use of enterprise shared ledger (ESL) software will transform business more than enterprise resource planning (ERP) did a generation ago because it will go beyond automating existing process and will instead create new ways to do business.

Transparency is a route to trust. Click To Tweet

Consider the recent case study of Wirecard. The auditors reported that the company was solvent because they thought that there were bank accounts with billions of euros in them. It turns out that there were not. What a simple problem to solve! If only there was some form of immutable record of transactions that companies could use to store account balances digitally-signed by their banks and that investors, customers, suppliers and regulators could use instead of auditors to determine that the assets of companies exceed their liabilities! Transparency is a route to trust.


with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

Put the transactions on a blockchain and no more fraud then? It’s not that easy. Some of the information in the ledger is confidential: it should only be accessed by the customers, the banks involved in the transactions and perhaps the market where the transactions take place. There are many applications where the transactions must be private. Therefore we need mechanisms to exploit the beneficial transparency of the shared ledger in such a way as to preserve necessary privacy.

What sort of mechanisms? Well, many years ago Eric Hughes, the author of the “cypherpunk manifesto” in the early 1980s, wrote about “encrypted open books”, a topic that now seems fantastically prescient. His idea was to develop cryptographic techniques so that you could perform certain kinds of public operations on private data: in other words, you could build “glass organisations” where anyone could run software to check your accounts without actually being able to read every item of data in them.

It sounds completely crazy and in fact it is a perfect example of what I’ve previously labelled counterintuitive cryptography. The idea of open book accounting is to use homomorphic encryption to store records in a form where they can only be read by authorised parties but can nonetheless be subject to some basic computation while still encoded. In other words you can determine that (encrypted 2) + (encrypted 2) = (encrypted 4) without ever being able to read the “2” or “4” .

This means that you can prove certain assertions about data without ever revealing what the data actually is. One obvious use of this, and as far as I can remember this was central to Eric’s discussion of the topic, is to take a list of the encrypted assets of the company together with a list of the encrypted liabilities of the company and compute that the company’s assets exceeds liabilities. Thus you can, essentially, audit that the company is solvent without being able to read what any of the assets and liabilities actually are.

(In practice, for this to work, the assets and liabilities have to be encrypted by some trusted third party. If I show you my encrypted Barclays bank statement then you have to know it is authentic so it would need to be digitally signed by Barclays, but that’s a topic for another day.)

When you combine the idea of open book accounting with Ian Griggs’ idea about triple entry accounting that dates from around the same time, you can see the basis for a new and more efficient financial infrastructure that is simultaneously the doom of auditors everywhere. If you are interested, there is a very comprehensive review of the origins and taxonomy of the intersection between open book, triple-entry and shared ledgers in a paper from Juan Ignacio Ibañez, Chris Bayer, Paolo Tasca and Jiahua Xu.

Remember in a triple entry system each of the parties to a transaction has a record of the transaction but there is a corresponding entry in a shared ledger that is computationally infeasible to falsify. The entries in my ledger are private to me and the entries in your ledger are private to you but the entries in the shared ledger are available to a much wider range of stakeholders but encrypted so that anyone can use calculations to determine that our assets exceed our liabilities, crucially without being able to read either. Pretty cool.

Transparency and Translucency

The impact of encrypted open books and triple entry working together in this way could be huge, because the transparency and automation means that we will no longer need to wait until the end of the reporting period to conduct an audit and produce results with the help of skilled financial professionals. Instead we will find ourselves in an era of ambient accountability, where the technological architecture means constant verification and validation. If you want to check whether a bank is solvent before you deposit your life savings there you will do it using an app on your smart phone not by looking at a year old auditor’s report covering some figures from a year before filtered through levels of management.

(Ambient accountability is a term that I borrowed from architecture to describe this infrastructure. It describes perfectly how transparency can transform the financial services industry and serves as a rallying cry for the next generation of financial services technology innovators, giving it a focus and raison d’être beyond shifting private profits from banks to technology companies and other third parties.)

Since the regulators will be able to use the technology, they will be able to spot unusual or inappropriate activity. What’s more, the information stored in the ledgers in encrypted form has been put there by regulated institutions so should there be a need to investigate particular transactions because of, for example, criminal activity then law enforcement agencies will be able to ask the relevant institutions to provide the keys necessary to decrypt the specific transactions. In this way the shared ledger can bring the technology of open book accounting to bear to exploit the beneficial transparency of the shared ledger in such a way as to preserve necessary privacy.

In a paper I co-wrote a few years ago with Richard Brown, then at IBM, and Consult Hyperion colleague Salome Parulava [published as “Towards ambient accountability in financial services: shared ledgers, translucent transactions and the legacy of the great financial crisis.” Payment Strategy and Systems 10(2): 118-131 (2016).], we borrowed the term “translucent” from Peter Wayner to mean transactions that are transparent for the purposes of consensus (in other words, we can all agree that the transaction took place and the order of transactions) but opaque to those not party to the trade or the appropriate regulators under the relevant circumstances.

I gave this talk introducing these concepts at NextBank Barcelona back in 2015 (building on the talk about “The Glass Bank” that I first delivered back in 2011) and I’m very interested to see the continuing developments in the field. To give just one example, Richard Brown is now the CTO at leading Enterprise Shared Ledger (ESL) software provider R3. R3 recently released their Conclave product that takes an interesting step in this direction, allowing organisations to exploit Intel SGX secure hardware to remotely verify what other organisations can and cannot do with shared data.

It seems clear that for financial markets this kind of controlled transparency will be a competitive advantage for both permissioned and permissionless ledgers: as an investor, as customer, as a citizen, I would trust these organisations far more than “closed” ones. Why wait for quarterly filings to see how a public company is doing when you could go on the web at any time to see their sales ledger? Why rely on management assurances of cost control when you can see how their purchase ledger is looking (without necessarily seeing what they’re buying or who they are buying it from)?

A market built up from “glass organisations” are trading with each other, serving their customers, working with regulators in entirely new ways, is a very attractive prospect and suggests to us that new financial market infrastructure may be on the horizon and that the lasting impact of shared ledger technology will not be to implement existing banking processes in a new way but to create new kinds of markets and therefore new kinds of institutions.

In this world, whether it is Wirecard, Enron, Tether or anyone else, nobody will be required to rely on the word of auditors because they can simply calculate for themselves whether the company is solvent or not. No more relying on tips and whispers to find out whether the money in some remote bank account is sufficient to cover the liabilities in other jurisdictions: cryptographic proofs will replace auditing and apps will replace auditors.

[An edited version of this piece first appeared on Forbes, 17th January 2021.]

Crime, Coins, Cryptography and the Quantum Future

There are people who prefer to exist in a cash economy for reasons other than their negative economic analysis of central bank monetary policies or an attachment to the iconography of banknotes. Criminals and corrupt politicians, for example. Cash works rather well for them, but can sometimes be quite inconvenient.

Last year I wrote about two Californian working-from-home pharmaceutical freelancers who were arrested after police caught them dumping nearly $1 million in cash which was intended to buy Mary Jane for business purposes. Dumping a million bucks in notes is time-consuming and inconvenient, which set me thinking.

I can understand why the disconnected, marginalised poor in remote parts of the world eschew the benefits of electronic payments for the currency of choice for the global criminal on the go, the $100 bill. But in California? Don’t they have Bitcoin there? Given the huge hassle of counting, bagging and transporting the Benjamins, why didn’t these wacky baccy impressarios simply buy a few Bitcoins, drive to the drop zones and press the “giddy up” button when the goods were in place!

They stayed analogue. They packed up the greenbacks and set off in their car. It could have been that they’d read that quantum computers will be able to break Bitcoin’s cryptography next year and decided that the trunk of a car was the more secure alternative. The point is they were not interested in friction-free instant dollar dollars. So I must ask the obvious question: if drug dealers won’t use Bitcoin for purchases, who will? How can it be more convenient to cart around great wodges of cash than to zip some magic internet money through the interweb tubes?

It is important to note that Bitcoin is far from being a perfect solution for criminal on the go, though. Speaking at this year’s virtual Davos, Glenn Hutchin (co-founder of global technology investment firm, Silver Lake) said that Bitcoin is not the best choice for criminals and that “a drug dealer, for example, would not want to have to speculate on the price of bitcoin while selling his wares”. This clearly not true for all drug dealers: a counterexample being the Irish drug dealer who wisely decided to invest in cryptocurrency rather than euros and who amassed a fortune in digital loot. He hid the passwords to the digital wallets holding his ill-gotten gains in his fishing rod.

The drug dealer in question, Mr. Collins, was stopped but the Irish police in the early hours of the morning by chance. Unfortunately for him, he had €2,000-worth of weed in the car and he was arrrested. His properties were searched, and industrial scale cannabis farming was discovered.

He got five years.

Meanwhile, his 12 Bitcoin wallets, containing 6,000 Bitcoin (then worth $50m-ish but now worth $200m-ish) were seized by Ireland’s Criminal Assets Bureau (CAB). Unfortunately the fishing rod with the scribbled passwords had “gone missing” but CAB believes it is “only a matter of time” before computer advances allow them open the digital treasure chest.


with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

Presumably, by “only a matter of time” they mean that they are waiting for the quantum computers to come along a unlock the wallets. They are in good company, because a great many other people (eg, organised crime, unscrupulous “whales” and the tax authorities of many nations) are waiting for them too. Now, code-cracking quantum computers will happen (as I wrote 15 years ago), but they won’t happen tomorrow. Professor John Martinis, who used to be the top scientist in the Google quantum computing team, says that Google’s plan in this field is to build a million-qubit system with sufficiently a low error rate that error correction will be effective. He says that at this point, about a decade away, then the system will have enough logical quits that the system will be able to execute powerful algorithms that attack problems that are beyond the capability of classical supercomputers.

By “only a matter of time” they mean that they are waiting for quantum computers to come along a unlock the Bitcoin wallets. Click To Tweet

For technical reasons to do with public keys and things, the accountants Deloitte reckon that about four million Bitcoins could be stolen by a quantum computer. With Bitcoin at $30,000 that means a pot of a hundred billion dollars or so is at the end of the quantum rainbow. Well worth spending a few billion to build such a device if you are a criminal, well worth spending tens of billions or even hundreds of billions on such a device when Bitcoin has taken over and has become the need digital gold worth $1m each or whatever.

It’s a serious threat, and plenty of people have already started work on plans to migrate Bitcoin to more quantum-resistant forms of cryptography (see, for example, “Committing to quantum resistance: a slow defence for Bitcoin against a fast quantum computing attack” from 2018) but these schemes still need access to the old, vulnerable wallets to transfer the cryptocurrency to the new, less vulnerable wallets.

The idea of using quantum technology to make better electronic money is not a new idea, b the way. As the Swedish Central Bank’s recent working paper on Quantum Technology for Economists points out, out the original concept of quantum money (dating back to the early 1980s) exploits “the no-cloning theorem” proven by Wootters and Zurek (1982). This means that it is not possible to clone an unknown quantum state so a counterfeiter with unlimited resources will still not be able to copy a quantum coin. Therefore quantum cryptocoins can act more like actual coins (that cannot be double-spent) and that opens up some pretty interesting thinking. As my digital currency technology tree (below) shows, this opens up an interesting third way to pan-galactic digital currency in the future: we can prevent double spending of person-to-person digital cash in hardware (using chips), in software (using blockchains) or in nature (using qubits).

Digital Currency Taxonomy with Quantum

Still, assuming that the Irish police get hold a quantum computer before the Mafia do, there is a tidy amount sitting not only in Mr. Collins wallets (as there is in Mr. Satoshi’s) and the next time the Gardai pull someone over in the middle of the night it will be in a Lambo.

[An edited version of this post appeared on Forbes, 10th January 2020.]

Legal and illegal tender

China is home to not one but two fascinating experiments in what people have taken to calling “stablecoins”. One of them is the public electronic cash system run by the People’s Bank of China (PBOC), known as the Digital Currency/Electronic Payment (DC/EP) or the digital Yuan. The other is the private electronic cash system run by Hong Kong-based Tether Limited, the cryptocurrency stablecoin known as the Tether. The main use case for the former is currently retail purchases whereas the main use of the latter appears to be market manipulation and money-laundering.

We can learn a lot from studying the dynamics of these to help us to understand how the world of digital currency might develop and whether cryptocurrency might one day become legal tender.

Let’s have a look at illegal tender first. In 2019, USDT surpassed Bitcoin as the most-traded cryptocurrency on the market by volume. This is not, as you might imagine, because consumers prefer to USDT to Visa for ordering a taxi to take mother to church on a Sunday. As reported by Nikkei Asia, USDT is widely used in money laundering, gambling and other illegal activities. China’s Ministry of Public Security has reported that in the first nine months of 2020, police cracked down on 1,700 online gambling platforms and 1,400 underground banks involving more than $153 billion in illegal transactions. Now, not all of this was in Tether, of course. But the number did catch my eye, because I am always interested in use cases for cryptocurrency other the speculation.


with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

Now on to legal tender. Suzhou has long been spearheading trials of DC/EP and in a recent experiment the local municipal government gave away 100,000 digital “red packets”, each containing RMB 200 (around $30) in a lottery, to encourage resident and retailers to try out the electronic cash for themselves. The South China Morning Post reports on the roll-out of the digital Yuan with the example of “shopkeeper Ma” who said that he found the digital currency to be a convenient way to receive and make payments. Not that it matters whether he finds it convenient or not, to be fair, because according to an “operational guidance” document given to the retailers in the pilot programme, they are allowed to decline payment in Alipay or WeChat Pay, but they “cannot decline payment in e-yuan”.

You can see the trajectory. The PBOC published a revised draft of the People’s Bank of China Law in October, laying out the legal foundations for the e-Yuan. The law, in essence, already says that the e-Yuan has the same legal status as the Yuan. Indeed, last year the PBoC issued a formal notice clarifying that cash is legal tender in China and that refusing it is illegal. More recently, it has called for wider acceptance of cash in economic activities and “vowed to punish” those who refuse to accept cash payments. So in China, both the Yuan and e-Yuan will be legal tender and retailers will have to accept both.

Legal Tender

I remember a story about a schoolboy who was refused access to a bus in Wales for trying to pay with a Scottish banknote. The bus company was pressured and apologised, saying that “Scottish currency is legal tender”. Actually, it isn’t. Scottish banknotes are not legal tender in England or, for that matter, Wales any more than Bitcoins or e-Yuan are. Only Bank of England banknotes are legal tender in England and Wales. But there are Sterling banknotes printed by banks in Scotland and in Northern Ireland that are not. Scottish banknotes are not legal tender anywhere, even in Scotland. In fact, Bank of England banknotes are not legal tender in Scotland either, because Scotland has a separate legal system to England and has no legal tender law at all.

This quaint monetary arrangement might seem odd to Americans, but it helps me to make a point. In America as in Britain, legal tender does not mean what you think it means. wrote about this in some detail after someone on Twitter told me that Bitcoin was legal tender in Germany. It isn’t, of course. In fact, Bitcoin isn’t legal tender anywhere and it never will be any more than British Airways frequent flier miles will be (and I’ve bought more cups of coffee with British Airways frequent flier miles than I’ve ever bought with Bitcoin).

Let’s dive in!

Section 31 U.S.C. 5103 on “Legal tender” states that “United States coins and currency [including Federal reserve notes and circulating notes of Federal reserve banks and national banks] are legal tender for all debts, public charges, taxes, and dues”. Here is chapter and verse from The Fed commenting on what that means: “This statute means that all United States money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise”.

So… would a U.S. central bank digital currency (e$, for short) might become legal tender in the future. Here, I think the answer is unequivocal: yes, and in unlimited amounts, because there is no credit risk attached. I predict that a transfer of e$ will be considered legal tender all debts, public charges, taxes and dues. In time, Section 31 U.S.C. 5013 will undoubtedly be extended to say so.

But so what if a digital dollar become legal tender? The physical dollar is legal tender in the U.S. right now and plenty of retailers won't take it. Click To Tweet

There is no federal law that forces people to accept dollars as it is, which is why you see municipalities passing local ordinances to force retailers to accept cash. (These ordinances are, by the way, a bad idea but that’s a story for another day.)

Would the U.S. amend legal tender law to go as far as China and force merchants to accept a CBDC? I doubt it. Would the Fed declare any digital currency that meets regulatory approval to be legal tender and retailers will have to accept both physical dollars and digital dollars? It seems unlikely. Would the US accept CBDC for the payment of tax? Actually, that day might not be so far away, as far I as am concerned what is or isn’t accepted for the payment of taxes is a much better measure of what is or isn’t a currency than outdated concepts of legal tender!

[An edited version of this post appeared on Forbes, 4th January 2020.]