A polymer paradox

The governor of the Reserve Bank of Australia Philip Lowe has more than once referred to the interesting dynamics around cash down under. The paradox is that despite retail points of sale tending toward cashlessness, the demand for banknotes is close to a half century high. More specifically, he has pointed out that “there are 14 $100 notes on issue for every Australian, 30 $50s, and seven $20s. That makes for around $3000 worth of banknotes on issue for every Australian”, before going on to ask where exactly all that cash is, saying that “I, for one, don’t have anywhere near that amount”.

Me neither, although I just checked and I do have A$25 in my travel draw in my study, so perhaps one explanation is that lots of visitors get some Aussie dollars out at the airport and then discover that they never need them because there’s nowhere that you need to use cash and then forget to spend them before they leave. But that can’t account for anything but a tiny fraction of the $75 billion odd in circulation. 

We need to look elsewhere for the missing money. In a November 2018 speech in Sydney, Mr. Lowe further referred again to the apparent paradox between the declining use of cash and that rising value of banknotes on issue. This is not a purely Australian phenomenon. We see the same paradox in the UK, because the fact is that in developed markets cash is no longer primarily a means of exchange. Figures from the Bundesbank show that nine out of every ten euro banknotes issued in Germany are never used in payments but hoarded at home and abroad as a store of value. Not “rarely”. Not “infrequently”. Never. The notes are not “in circulation” at all but are stuffed under mattresses.

IMG 2600

The main explanation given by the RBA is that some people choose to hold a share of their wealth in Australian banknotes. In RBA Research Discussion Paper 2018-12 “Where’s the Money‽ An Investigation into the Whereabouts and Uses of Australian Banknotes”, the authors (Richard Finlay, Andrew Staib and Max Wakefield) go in to some detail to determine that of total outstanding banknotes:

  • 15–35 per cent are used to facilitate legitimate
    Transactions (I’d actually be surprised if it was ten per cent by now);

  • roughly half to three-quarters are hoarded as a store of wealth or for other purposes, of which

    • we can allocate 10–20 percentage points to domestic hoarding (this now seems small to me, given the lack of transactional usage and the ban on cash transactions over $10,000);

    • up to 15 percentage points to international hoarding, which includes the A$25 in the draw in my study;

    • 4–8 per cent are used in the shadow economy. Some more recent figures show that up to A$1 billion is held by drug dealers alone at any one time before they convert their earnings to assets);

    • and 5–10 per cent are lost.

These are very broadly similar to the Bank of England’s calculations. In general, it seems that very little cash is used for legitimate transactions and central banks see the biggest use of it as for hoards. Personally, I distinguish between hoards and stashes and I have a strong suspicion that cash (in particular those $100 bills that the governor refers to) are a major component of stashes and that the provision of cash therefore provides something of subsidy to the criminal fraternity. But this of course may simply be my suspicious mind. I’m sure most of those $3,000 in banknotes for every Australian are used for entirely legitimate reasons.

Anyway, good news. Some of the missing Australian banknotes have turned up. A Mr. Simon Cross was pulled over in Queensland this week and when the police looked in his car they found $4.35 million in cash ($1.75 million in a suitcase and $2.61 million in a cardboard box). I don’t doubt that there is an entirely innocent explanation for Mr. Cross’ mobile hoard. I expect his preference for cardboard boxes full of cash is wholly reasonable response to the low interest rates currently available on Australian savings accounts.

4th July!

July 4th! Such an important anniversary! I look forward to it every year, and every year I spend the 4th reflecting on revolution and the course of history. I’m sure you know why, but if you don’t, well, here is a hint. It’s the front page of the Swindon Evening Advertiser from July 4th 1995, the day I finally made the front page of my home town newspaper.

(Got to see my picture on the cover, got to buy five copies for my mother…)


Mondex Launch 

Yes, I was there on 3rd July 1995 in Swindon town centre when the Swindon Evening Advertiser vendor Mr. Don Stanley (then 72) made the first ever live Mondex electronic cash sale.  It was a very exciting day because by the time this launch came, my colleagues at Consult Hyperion had been working on the project for several years! For those of you who don’t remember what all of the fuss was about: Mondex was an electronic purse, a pre-paid payment instrument based on a tamper-resistant chip. This chip could be integrated into all sorts of things, one of them being a smart card for consumers.

Somewhat ahead of its time, Mondex was a peer-to-peer proposition, which we’ll come back to later on. This meant that the value was transferred directly from one chip to another with no intermediary and therefore no cost. In other words, people could pay each other without going through a third party and without paying a charge. Unlike Bitcoin, transactions were actually instant and were actually free.

It was true cash replacementinvented at National Westminster Bank (NatWest) in 1990 by Tim Jones and Graham Higgins. Swindon had been chosen for the launch because, essentially, it was the most average place in Britain. Since I’d grown up there, I was rather excited about this, and while my colleagues carried out important work for Mondex (e.g., risk analysis, specification for secure transfer, multi-application OS design and such like) I watched as the fever grew out in the West Country.


Mondex Billboard 

Many of the retailers were quite enthusiastic because there was no transaction charge and for some of them the costs of cash handling and management were high. I can remember talking to a hairdresser who was keen to go cashless because it was dirty and she had to keep washing her hands, a baker who was worried about staff “shrinkage” and so on. The retailers were OK about it. For example here’s a quote from news-stand manager Richard Jackson: “From a retailer’s point of view it’s very good but less than one per cent of my actual customers use it. Lots of people get confused about what it actually is, they think it’s a Switch card or a credit card”. That’s if they thought about it all.

It just never worked for consumers. It was a pain to get hold of, for one thing. I can remember the first time I walked into a bank to get a Mondex card. I wandered in with 50 quid and had expected to wander out with a card with 50 quid loaded onto it but it didn’t work like that. I had to set up an account and fill out some forms and then wait for the card to be posted to me. Most normal people couldn’t be bothered to do any of this so ultimately only around 14,000 cards were issued.

I pulled a few strings to get my mum and dad one of the special Mondex telephones so that they could load their card from home instead of having to go to an ATM like everyone else. British Telecom had made some special fixed line handsets with a smart card slot inside and you could ring the bank to upload or download money onto your card. I love these and thought they were the future! My parents loved it, but that was nothing to do with Mondex: it was because, in those pre-smartphone days, it was a way of seeing your bank account balance without having to go to the bank or an ATM or phone the branch. You could put the Mondex into the phone and press a button and hey presto your account balance would be displayed on the phone. This was amazing a quarter of a century ago.

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

It is possible that I’m not remembering this absolutely accurately, but I do remember these were two places where the hassle of getting the electronic value outweighed the hassle of fiddling about with coins: the bus and the car park. My dad really liked using the card in the town centre car park instead of having to fiddle about looking for change but it often didn’t work and he would call me to complain (and then I would call Tim Jones to complain!). I remember talking to Tim about this some years later and he made a very good point which was that in retrospect it would have been better to go for what he called “branded ubiquity” rather than go for geographic coverage. In other words it would have been better to have made sure that all of the car parks took Mondex or make sure that all of the buses took it or whatever.

So why I am wallowing in this nostalgia again? Why should more people be celebrating the Mondex Silver Jubilee? Well, look East, where the first reports have appeared concerning the Digital Currency/Electronic Payment (DC/EP) system being tested in four cities: Shenzen, Chengdu, Suzhou and Xiong’an. DC/EP is the Chinese Central Bank Digital Currency (CBDC).

DCEP phone

with the kind permission of Matthew Graham @mattysino

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

He went on to say that the circulation of the digital Yuan should be “based on ‘loosely coupled account links’ so that transactional reliance on accounts could be significantly reduced”. What he means by this is that the currency can be transferred wallet-to-wallet without going through bank accounts. Why? Well, so that the electronic cash “could attain a similar function of currency to cash… The public could use it directly for various purchases, and it would prove conducive to the yuan’s circulation”. How will this work? Well, you could have the central bank provide commercial banks with some sort of cryptographic doodah that would allow them swap electronic money for digital currency under the control of the central bank. Wait a moment, that reminds me of something because… yep, that’s how Mondex worked. There was one big difference between Mondex and other electronic money schemes of the time, which was that Mondex would allow offline transfers, chip to chip, without bank (or central bank) intermediation.

 Mondex Paraphanalia

Offline person to person transfers. That’s huge. Libra can’t do it, and never will be able to. To understand why, note that there are basically two ways to transfer value between devices and keep the system secure against double-spending. You can do it in hardware (ie, Mondex or the Bank of Canada’s Mintchip) or you can do it in software. If you do it in software you either need a central databse (eg DigiCash) or a decentralised alternative (eg, blockchain). But if you use either of these, you need to be online. But with hardware security, you can go offline.

After all these years, the People’s Bank of China have decided to go down the Mondex route, so now seems a good time go to think back to those long ago days and see what lessons might be passed on to a new generation of electronic cash entrepreneurs. I’ll focus on three here.

The
first lesson is that banks aren’t very good at launching products that compete with their existing core businesses. Consult Hyperion’s later experiences with (for example) M-PESA, suggest that a lot of the things that I remember that I was baffled and confused by at the time come down to the fact that it was banks making decisions about how to roll out a new product. The decision not to embrace mobile and Internet franchises, the decision about the ATM implementation, the stuff about the geographic licensing and so on.  There were many people who came to the scheme with innovative ideas and new applications – retailers who wanted to issue their own Mondex cards, groups who wanted to buy pre-loaded disposable cards and so on. They were all turned away. I remember going to a couple of meetings with groups of charities who wanted to put “Swindon Money” on the card, something that I was very enthusiastic about. But the banks were not interested in anything other than retail payments in shops (shops who already had card terminals that didn’t take Mondex, basically).

The
second lesson is that the calculations about transaction costs (which is what I spent a fair bit of my time doing) actually really didn’t matter: they had no impact on the decision to deploy or not to deploy in any particular application. I remember spending ages poring over calculations to work out that the cost of paying for satellite TV subscriptions would be vastly less using a prepaid Mondex solution rather than building a subscription management and billing platform: Nobody cared, because reducing costs for merchants was no-one in the banks’ goal.

The
third lesson is that while the solution was technically brilliant it was too isolated. The world was moving to the Internet and mobile phones and to online in general and Mondex was trying to build something that was optimised not to use of any of those. Thinking about it now, it seems odd that we made cash replacement systems such as Danmont, Mondex, VisaCash and used them to compete with cards in the physical world rather than target them where cash was a pain, such as vending machines and web sites. I hope I’m not breaking any confidences in saying that I can remember being in meetings discussing the concept of online franchises and franchises for mobile operators. Some of the Mondex people thought this might be a good idea, but the banks were against it. They saw payments as their business and they saw physical territories as the basis for deployment. Yet as The Economist said back in 2001, “Mondex, one of the early stored-value cards, launched by British banks in 1994, is still the best tool for creating virtual cash“.

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

Well, here we are. Mobile phones have caught on, and the People’s Bank of China are using them to deliver two-tier central bank digital currency into the mass market. I am pretty sure that they will have learned from the Mondex experiments in Manhattan and Guelph, in Hong Kong and in Sydney. The Mondex Silver Jubilee will be celebrated in a way that could never have been imagined on 4th July 1995: with central bank digital currency spreading across Shenzen rather than Swindon.

The First Rule of Hollywood is the First Rule of Cryptocurrency too

You may have heard of Matty Simmons. He was the man behind the movie “Animal House”. That’s interesting enough for one lifetime. But if you are interested in electronic payments, you should read his 1995 book. I have it in front of me as I write. He just died, aged 93. My friend the author, storyteller and all round nice guy Jeffrey Robinson wrote a brilliant piece on Simmons’ role in founding the payment industry, and it was brilliant. He was, as Jeffrey put it, a witness to an event “which changed our world, but never actually happened”.

This event was the legendary New York supper in 1949 in The Major’s Cabin Grill at 33 West 33rd Street, known to everyone in the business as the birth of the Diners’ Club card and therefore the modern payment card industry. The apocryphal version (as told here by Lana Swartz) is that lawyer Frank McNamara forgot his wallet and had to call his wife who drove into the city from Long Island with money for him to pay. Like everyone else, I’d seen this story in many places and had always assumed it to be true. But it turns out that this story was made up by Simmons, who had been hired as the first employee of McNamara’s nascent Diner’s Club! As Simmons later said, he had to “glamorize the creation of the credit card”. In reality, McNamara had had the idea some time before and spent months going around Manhattan with Simmons to try and drum up interest in the idea before eventually persuading  street to take the first payment by general-purpose charge card. 

Think about the problem Simmons was faced with. An entirely new way to pay. The public had never seen a payment card and didn’t know what one was or why they might want one. Matty must have been a PR genius. Look at this fascinating newspaper report from “The Hartford Courant” dated 23rd October 1962. It concerns the world premiere of a movie called “ The Man From The Diners’ Club ”:

The Board of Selectmen unanimously adopted an ordinance Monday night to prohibit the use of money and place the entire town on credit for a day next March 13. Columbia Pictures “The Man From the Diners’ Club” will have its world premier at the Strand Theater here that day. On the day of the premiere, all transactions by local merchants will be by Diners’ Club cards only. The ordinance says it will be “unlawful for any person to pay cash for any article or goods purchased and it shall be unlawful for any merchant to accept cash for any article or goods sold.” Diners’ Club cards will be issued to the entire population of the town for the premiere day with junior cards for children.

What an amazing promotion! A cashless city in the USA half a century back! OK, so it was only for a day, but even so that was pretty cool. The Mayor of Hartford is reported as saying that “I am especially pleased to participate in this progressive experiment in the use of credit which may prove to the business world that the future method of transacting business will be through such a device as a single credit card” (my emphasis). What a forward looking guy!

Anyway, here’s the trailer for the film, which was written by William Blatty (who went on to write “The Exorcist”). The New York Times review said of Kaye that “his acting in it is so disordered, so frantic without being droll, so completely devoid of invention and spontaneity that he did no more than remind us, somewhat sadly, of that other Danny Kaye and what a terrible thing television has done to comedy on the screen”.

This picture of Danny illustrates an amazing item of payment trivia that Lana pointed out to me. Danny is shown clowning around in front of a computer that looks exactly as you would imagine in a film from 1963. But Diners’ Club didn’t have a computer, this was invented for the film. Simmons says that they did not go over to computers until 1968!

I watched the film so you don’t have to.

At several points the characters stop the action in order to explain how a Diners’ Club card works! So someone would say “now I’m going to phone Diners’ Club to check that this card is valid” and someone else would say “Hey the card comes with a booklet showing you all the places you can use it” or an incredulous supporting player would gasp when told that you could use a card to pay for an airline ticket. All a bit ham-fisted, but at least American consumers would come out of the movie understanding what a payment card does.

So where’s Bitoin Matty? Perhaps what the world of cryptocurrency needs is a movie featuring a popular comedian, much loved by the public (excluding me) for his clowning skills, who works for a cryptocurrency exchange and who, via a serious of hilarious incidents, explains what cryptocurrency is and why the general public should use it. Mr. Bean Gets REKT, perhaps, or Mrs. Brown’s HODL Boys. I’ve already thought up a few example incidents for my pitch to an actual film producer…

  • “The hard drive crashes and customers lose all of their bitcoins”

  • “The exchange gets hacked and customers lose all of their bitcoins”

  • “The dog eats the cold wallet and customers lose all of their bitcoins”

  • “The exchange turns out to have been a scam and customers lose all of their bitcoins”

  • “The PC is infected with malware that steals the password and the exchange loses all of their bitcoins”.

  • “The guy running the exchange fakes his own death and customers lose all of their bitcoins”

What do you think? Maybe that last one is little far-fetched, but I think I’m on to a winner. Remember, William Goldman’s first rule of Hollywood is “no-one knows anything” and that’s first rule of cryptocurrency markets as well.

[This is an edited version of an article that first appeared on Forbes, 15th June 2020.]

Waving in Waitrose

Normal people don’t pay much attention to this sort of thing, but I was very interested to see a new sign outside my local Waitrose a few days ago…

Wave Wonga at Waitrose

I don’t ever remember seeing one of these signs before, but I was happy to see it all the same because thanks to COVID-19, people are discovering that using their mobile phone to pay for their weekly shop is pretty convenient (because the £45 limit does not apply, so you can pay for all of your shopping by mobile) and I doubt they’ll go back to cash. Barclaycard has just reported that more than 90 per cent of face-to-face transactions are now made using contactless (which increased by a quarter in 2019 compared with the year before).

So why is there no limit (well, £10,000 in Waitrose) on mobile payments? Well, it’s actually not a new development! As I wrote here back in 2016, when my colleagues at Consult Hyperion were advising a number of issuers and acquirers about high-value contactless payments and their implications at retail point-of-sale, “Waitrose takes contactless, and they’ve implemented in properly (with CDCVM)”.

If you are not familiar with CDCVM, here’s a quick primer on high-value contactless payments that I wrote a few years ago to explain how authentication options work with the contactless no-CVM (consumer verification method) limits. The no-CVM payment limit is for “tap and go” transactions where there is no PIN, signature or anything else required from the customers who are waving their cards over the contactless readers. This limit has just been raised from £30 to £45, which is why (I assume) that Waitrose had decided to put these signs outside the store.

The “Consumer Device Cardholder Verification Method” (CDCVM) is a type of CVM. CVM is, as I am sure you know, part of the EMV specifications, which allows for a number of different CVMs and any particular card will have the acceptable CVMs stored on it, in an order set by the bank that issued it.

CDCVM is the type of CVM that applies to transactions originating from a contactless device rather than a contactless card. Verification is used to evaluate whether the person waving the phone around to make a contactless transaction is in fact the legitimate user and affects where the liability lies for fraudulent transactions. It’s called device verification because the customer authenticates to their own device, not the reader in Waitrose. It’s not the point of this post, but frankly this is how everything should work in the future, since customers should never be required to authenticate themselves using any device that is not their own. Putting a PIN in your phone is better than putting a PIN into Waitrose’s terminal and not simply because you might catch a deadly disease from it.

When you have a device capable of implementing CDCVM, such as a phone with Apple Pay or Google Pay, then this is used as the CVM. Provided that the terminal is running the correct software, your phone will take care of verification and the issuer can then decided whether or not to authorise the transaction or not based on the enhanced authentication. In the UK the rollout of this “high value contactless” infrastructure began some time before the Apple Pay launch.

66B9D7E7 9A57 40D8 BD88 1919B9EA2D1E

What all this means is that the £45 limit does not apply to mobile phones with strong authentication, provided the terminal is running the correct software, of course. Writing about this a few years ago, I noted more than once that consumers, as far as I could tell, needed the payments industry could do with some better communications around this sort of thing. Consumers are not aware of the high-value transaction capability of their devices, and if they were aware of these capabilities, they would have no way of knowing whether the retailer had implemented the necessary software change or not. So if I go to Tesco, for example, I would have no idea whether the limit is £45, £250 (which it is if I use the TescoPay app, plus extra Clubcard points) or whatever is for Apple Pay / Google Pay.

COVID is pushing us from contact to contact-free (via contactless), so now is a good time to follow Waitrose’s lead with clear messaging at POS to help consumers along on this journey.

Don’t listen to technologists (eg, me) listen to the anthropologists

I thoroughly enjoyed the FS Club discussion with eminent futurologists looking back on their predictions from the year 2000 (and learning from them where they were wrong) and looking forward t0 2040. I especially enjoyed it because one of the speakers was Gill Ringland. Gill is now a Director of Ethical Reading, set up to energise an ethical business climate in the Thames Valley, but in the past was head of strategy at ICL amongst other things. I had the good fortune to meet her way back, at the 2012 Digital Money Forum.  I’d been very impressed by a report that she’d written and asked her to come along and give a presentation about it. She gave a super talk about her exploration of the world of financial services in 2050 from the report “In Safe Hands” (published at Long Finance).

IMFS Scenarios

I wrote at the time that she had used a tried and tested scenario planning technique (the same one that I always use these days) to generate a 2×2 matrix of four scenarios imagined using the “Washington consensus” vs. “Community-based values” on one axis and “mundane” and “virtual” (essentially) on the other axis to reflect the extent to which real or virtual communities come to shape the economy and therefore financial services. Gill explained at the time that in order to create scenarios (i.e., internally-consistent views of possible futures) for a generation from now, she found it useful to look two generations back, and consider the asset classes managed by the financial services industry in 1930. These were broadly commodities, cash, equities and brains. Looking forward, she added a fifth asset class based on demographics for 2050.

Transactions, therefore, become the exchange of these asset classes (but in digital form, of course). This seems to me especially interesting in a city-centric context because, for example, a permit to reside in a desirable city could well become a key tradable commodity. Indeed, this view was reinforced in the FS Club discussion, where the even more expensive view that cities might begin to dictate the policies and trajectories of the nation state was put forward. In this context, Gill’s prescient narrative of the “C50” (the organisation of the 50 richest city-states that will replace the G20 as the mechanism for “managing” the world economy) which came from her “Many Hands” scenario, forms a solid narrative around the future economic organisation of a successful, functional world. As Martin Wolf wrote in the FT around that time “this is the age of cities, not of national economies” (going to say that “it is high time London became a true city state).

(This surely implies that the “cash” of cities will become the most important kind to the average person. In other words, having abandoned Sterling for London Lolly and US Dollars for New York Notes and LA Loonies, will these be sufficient to provide the medium of exchange for the future economy. Right now, almost all transactions are local and even at the national level only 1%-2% of European transactions are cross border. If I live in London and use London Lolly for the train, for lunch and at the supermarket, is it such a big deal to convert it to Moscow Moolah to buy something online? Especially when your phone does it for you?)

A world economy built up from cities and their hinterlands will obviously demand different financial services and institutions from one based on national economies. This was foreseen by the wonderful Jane Jacobs’ work “Cities and the Wealth of Nations” that was published way back in 1984. My Jacobs-influenced city-centric perspective was reinforced when I happened to read a Canvas8 report “The city an an identity anchor” (which echoed Gill’s points about identity, which I’ll return to in a minute) and then the World Economic Forum (WEF) 2017 report “Cities, not nation states, will determine our future survival”.

What this means to me is that the future sense of identity will be city-centric, with people seeing themselves as Londoners and New Yorkers rather than Brits and Yanks, a view that the COVD-19 crisis seems to have reinforced. Their loyalties will be more local than ours and the relationships between cities will replace the relationships between countries as the most important tensions and dynamics. I can’t help but wonder if cities will begin by forming trade pacts and then moving on to form defence alliances, bearing in mind that the wars of the future will be fought in cyberspace. Never mind national identity in the India (Aadhar) model or provincial identities as in Canada. What if these specific city identities are the core of the future digital identity models?

Passports in Pimlico

This leads me to wonder yet again what the model of city-centric identity might be. How will those identities relate to trade, commerce and society as a whole? Which attributes will be the valuable ones (beyond is_a_person, of course) and which will atrophy to form vestigial credentials of no practical value? When discussing the C50 scenarios back in 2012, Gill made a passing but powerful observation on future transactions and it has stayed central to my thinking on the topic. She said that individuals will protect their “personal identity, credit ratings and parking spaces” at all costs and I think this is a powerful and imaginative narrative to group ideas about attributes and credentials.

Personal identity. I might take issue with Gill here and say “personal identities” but I know what she means. An infrastructure that delivers both security and privacy to identity transactions of call kinds will be needed to support the reputation economy of the networked society. There is no possibility of social media and social democracy co-existing in this future scenario without such an infrastructure.

Credit rating. The commercial reputation that means that you can buy or sell, whether an individual or an organisation will be central to economic existence. In a networked society, this is more likely to be something that comes from the social graph than the conventional credit rating of today.

Parking spaces. This means the (tradeable) right to reside in a particular place. These rights will certainly be of critical importance to the individual, since their own identity will be closely related to the city (and hinterland) of residence. There’s no reason why (for example) London and Scotland should have the same immigration rules. If that sounds a little far-fetched, I can tell you that it is happening right now. I came across an interesting case study from Denmark via the social anthropologist Camilla Ida Ravnbol from the University of Copenhagen. Since the COVID-19 crisis has restricted travel, any “permission to work in Copenhagen” document has become a valuable traded commodity in the marginalised Roma community that needs access to the city to earn money (by collecting materials for recycling, for example).

In the language of digital identity, digital money and digital diligence, then, this line of thinking imagines a reputation economy anchored in the mundane which is (as I explored in my book “Before Babylon, Beyond Bitcoin“) a landscape animated by new technology but shaped by physical as well as virtual communities. What does this all mean for transactions? What does it mean for the future of the financial system? Or, more specifically, to answer the question asked at the very beginning, what does it mean for the world in 2040?

Well, I don’t know. But if I wanted to find out, I’d start by talking to social anthropologists. Fortunately, Camilla I will be chairing a session that touches on these issues along with Atreyee Sen at the European Association of Social Anthropologists conference in July. As the conference is now online, you can sign up and log in online to join us here. We are Panel 57, “Digital encounters, cashless cultures: Ethnographic perspectives on the impact of digital finance on economic communities”, so please do pop in and take part in the discussion.

 

What is the point of the “travel rule”?

A couple of years ago, as you may have read in the Financial Times at the time, the Financial Action Task Force (FATF) extended their recommendations to include cryptocurrency exchange and wallet providers and such like, referred to as Virtual Asset Service Providers (VASPs). This meant that all countries must supervise and monitor these, and that they should apply anti-money laundering and anti-terrorist financing controls: that is, customer due diligence (CDD), suspicious transaction reporting (STR) and the “travel rule”.

The decision to apply the same travel rule on VASPs as on traditional financial institutions was greeted with some dismay in the cryptocurrency world, because it means that the service providers must collect and exchange customer information during transactions. The technically non-binding guidance on how member jurisdictions should regulate their ‘virtual asset’ marketplace included the contentious detail that whenever a user of one exchange sends cryptocurrency worth more than 1,000 dollars or euros to a user of a different exchange, the originating exchange must send identifying information about both the sender and the intended recipient to the beneficiary exchange. The information must also be recorded and made available to “appropriate authorities on request”.

This identifying information, according to the FATF Interpretive Note to Recommendation 16, should include name and account number of the originator and benefactor, the originator’s (physical) address, national identity number (or something similar) or date and place of birth. In essence, this means that personal information will be smeared all over the interweb tubes. My good friend Simon Lelieveldt, who is very well-informed and level-headed about such things, said at the time that this is a “disproportional silly measure by regulators who don’t understand blockchain technology”, which may be a little harsh even if not too far from the truth.

Anyway, some folks from the land of crypto have put together a standard for implementing the travel rule in the hope of spurring interoperability and reducing the costs for all involved. The standard, known as IVMS101, defines a uniform model for data that must be exchanged by virtual asset service providers (VASPs) alongside cryptocurrency transactions. The standard (you can download it here) will identify the senders and receivers of crypto payments, with such information “traveling” alongside the cryptocurrency transactions but along a separate path (that is, the IVMS101 messages do not themselves need the blockchain or any other crypto infrastructure).

(If you are wondering why it’s called IVMS101, it’s because the SWIFT MT101 message is the global standard request for the electronic transfer of funds from one account to another. For those of us in the payments world, MT101 is mother’s milk: mandatory Tag 20 Sender Reference, optional Tag 21 Customer Specified Reference and so on and so on. The MT101 message is used throughout the business world to send bulk payment instructions (ie, a header and multiple payment instructions in a single message). There is also the MT103 message that instructs a single transfer but this is mainly used to move funds between banks and other financial institutions such as money transfer companies.)

IVMS101 is pretty thorough and it sets out in detail what messages should be passed from (eg) one Bitcoin exchange to another, along the lines of:

if the originator is a NaturalPerson then either (
     geographicAddress
with an addressType value of GEOG or HOME or BIZZ
     and/or customerNumber
     and/or nationalIdentification
     and/or dateAndPlaceOfBirth )
is required.

This sort of thing is needed because there’s no global standard digital identity that could be attached to messages so market participants have to make do with national solutions or proxies. Nevertheless, it’s a good standard (as you’d expect when you see who wrote it) but uncharitable persons might well be asking what the point of it is because law enforcement agencies can already get this information by presenting a warrant. What the travel rule does is to, essentially, automate mass surveillance without a warrant or any other oversight and force personal information on to marketplace intermediaries (where, in my opinion, it doesn’t belong – my date and place of birth is no business of either intermediary exchanges or, indeed, the destination exchange). What’s more, since the travel rule is for value transfers between exchanges, it seems rather unlikely that it will catch any criminal flows at all.

I, for example, have a Coinbase hosted Bitcoin wallet and a Bitcoin wallet on a USB stick. If I want to send money to criminals, I will transfer it from my Coinbase wallet to my USB wallet and then from my USB wallet off via mixers to the criminal’s USB wallet and the travel rule is irrelevant. The uncharitable people mentioned earlier will undoubtedly observe that since the actual travel rule doesn’t seem to have stopped money laundering which is a massive global industry, there’s no obvious reason why the virtual travel rule will stop electronic money laundering on a similar grand scale.

Writing in this month’s Chartwell “Compass” magazine, Omar Magana hits the nail on the head with respect to the travel rule, asking if “the enforcement of a regulation that was created over 20 years ago for a fast-evolving industry, may not be the best approach”. Note that he is not arguing against regulation, he is arguing (as I do) for a form of regulation more appropriate for our age (for which I use the umbrella term “Digital Due Diligence”, or DDD) using artificial intelligence and machine learning to track, trace and connect the dots to find the bad actors.

I am genuinely curious to learn more about whether the travel rule will make the slightest difference to the money launderers, so please do let me know in the comments whether such scepticism is misguided or whether the travel rule will make the world a safer place.

Scrip and truck

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

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

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

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

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

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

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

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

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

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

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

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

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

Send lawyers, guns and Bitcoin passwords

One of the arguments about the transition to a cashless, less-cash or contact-free economy is that such an economy marginalises people who are trapped in the cash economy and is very bad for them. I’m not sure it’s bad for them, though. I don’t want people to be marginalised, of course, but the people who are trapped in the cash economy are the people who end up paying the highest costs. Just to pick one random news story this week (and I could have chosen many), here’s a case from China in which a man who didn’t trust banks buried his life savings underground five years ago. When he dug it up, a quarter of it was beyond repair and he lost 500,000 Yuan.

Of course, there are people who prefer to exist in a cash economy for reasons other than a fundamental lack of trust in the international financial and monetary system. Criminals and corrupt politicians, for example. Cash works rather well for them, but can sometime be quite inconvenient. For remote purchasing, for example. Only yesterday I read about two freelance pharmaceutical intermediaries who were arrested in California after police caught them dumping nearly $1 million in cash which was intended to buy marijuana some distance from their main place of residence.

(If you are wondering why they didn’t just Venmo or Square Cash the money along I-5, remember that the state of California imposes a 15% excise tax on licensed cannabis so the cash-based black market avoids tax. The state estimates the regulated market has captured less than one-third of activity, once again suggesting to me that the primary function of $100 bills is tax evasion.)

“Well, we’ll see how smart you are when the K9 come!” / I got 99 problems but the Bitcoin aint one.

California, incidentally, has a huge $100 bill problem right now. The coronavirus has disrupted supply chains so that drug dealers in the USA cannot use the normal trade-based cross-border money laundering pathways to pesos. Hence, Hugh quantities of dollars are piling up outside the financial system.

(In other news, the Fed reports that as of 8th April there are $1.84 TRILLION of Federal Reserve notes in circulation, around $200 billion more than this time last year.)

Now, 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 entrepreneurs simply buy a few Bitcoins, drive to the drop zones and press the “send” button when the goods are in from of them. It only takes an hour or so for the half a dozen confirmations that the wholesale distributors would want to see, and then Bob’s your uncle. 

But no, they packed up the greenbacks and set off in their car.

Surely, I have to reflect, if drug dealers won’t use Bitcoin, then who will? There must be many people who don’t want to carry around huge wads of cash for such purchases. Why aren’t they in crypto? What about the millions of people who buy things that they would prefer not to show up on their credit card statements? Remember the newspaper story about noted England rugby player Lawrence Dallaglio’s credit card being used in a brothel in London? A police raid on the establishment uncovered burner phones, diaries, POS terminals, a bag filled with bank cards and receipts (what a well-run organisation!) showing that customers were were paying between £80 and £100 for a gram of coke and… no Bitcoin hard wallets or passwords written on Post-Its.

(If I was off to brothel and wanted to buy some cocaine while I was there, I would certainly be at the very least reticent to use my credit card, even if the establishment was PCI-DSS compliant, which I’m pretty sure a bag full of bank cards in a plastic bag in a toilet is not.)

Anyway, back to the point. How can it be more convenient to cart around great wodges of cash than to zip some magic internet money through the interweb tubes? That’s not to say that Bitcoin is the perfect solution for criminal on the go, though. For example, in a recent Irish case, a drug dealer who wisely decided to invest in cryptocurrency rather than the euro amassed a fortune of €54 million in digital loot. He hid the passwords to the digital wallets holding his ill-gotten gains with his fishing rod. Unfortunately, the fishing rod has “gone missing” so while the Irish Criminal Assets Bureau (CAB) has in theory confiscated the 12 wallets (containing 6,000 bitcoin), in practice they cannot get hold of them.

(On the other hand, thanks to people such as Chainalysis, the Irish police can at least find out who sent money to the wallet and where money from the wallets was sent to, which ought to help them further their investigations.)

The noted software entrepreneur John Macafee said, on a recent episode of the Breaking Banks radio show that I was co-hosting, said something similar. He said that Bitcoin is no good for this sort of thing because it can be traced (he has previously called Bitcoin “ancient technology”) and he advised listeners to use Monero instead saying that it hs 99% of the “dark” market right now and also that he is launching a distributed exchange for Monero in the near future. A recently published Rand Corporation study shows that Bitcoin and Monero dominate the black market with Zcash (the other leading privacy coin) nowhere to be seen. 

(The price of Monero has roughly halved over the last year so I guess that there just aren’t that many criminals out there right now, but who knows. )

I should note, though, that the issue of more private versions of digital currencies is not of exclusive interest to criminals and corrupt politicians. There are many people who are engaged in perfectly legal businesses (eg, selling weed in Colorado, performing adult services in Nevada or trying to buy food in Venezuela) that are still excluded from the global financial system and are therefore driven to look for alternatives.

Venezuela is an interesting example. It used to crop up in talks by Bitcoin fans although restaurants, shops, supermarkets and even the street vendors today accept – and prefer – dollars in cash or by bank transfer. You can pay by Zelle in supermarkets there! A Columbian start up, Valiu, has just launched to provide a USD “stablecoin” for the Venezuelan market so perhaps that might eat into the bank transfer market but I wouldn’t bet on it.

What, no Bitcoin?

What’s the niche for cryptocurrency then? A quick investigation tells me that the market-leading porn site accepts four cryptocurrencies, three of which I’ve never heard of, and not Bitcoin, Monero or Zcash although that may change soon as a number of campaigners have sent letters to Visa, Mastercard, Amex and all demanding that they stop processing payments for porn. Mastercard said that they were investigating claims made the and would “terminate their connection to our network” if illegal activity was confirmed.

If the porn people won’t use Bitcoin, then who will? Maybe taking payment cards away from sites such as PornHub will stimulate evolution in user journey and ease of use for Monero et al and push them into the mainstream at last.

(It won’t, of course. What will actually happen is that the porn and gambling guys will get together and launch an over-18 version of Libra which, as it will be the only way to pay for these services, will soon become the currency of choice for adult services.  You read it here first. Pretty soon, the average person will have a digital wallet full of Facebucks and Buttbucks and precious little else.

We’re doing analog AML to try and catch digital criminals

My good friend Lisa Moyle sums up the unsatisfactory nature of the current situation with Customer Due Diligence (CDD) quite well, writing that the current rules are neither effectively preventing nor capturing crime. Instead, she says, they risk making financial institutions so overly cautious that they only serve to exacerbate the problem of the un- or under-banked and create barriers for honest customers. She is spot on.

Her comments remind me of those of Rob Wainwright, then Director of Europol, when talking about the great success of the continent’s $20 billion per annum anti-money laundering regime. He said that “professional money launderers are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate”. Although we are only intercepting 1% of the dirty money, the costs that the CDD regime impose on the finance sector are enormous. The costs of the Money Laundering/Terrorist Financing (ML/TF) regime is, according to the Journal of Financial Crime 25(2), “almost completely ineffective in disrupting illicit finances and serious crime”. 

But as Lisa has pointed out, not only does the regime we have now do little to hamper terrorists, money launderers, drug dealers, corrupt politicians or mafia treasurers, it does massively inconvenience law-abiding citizens going about their daily business. According to another piece in the Journal of Money Laundering Control 17(3), the Financial Action Task Force (FATF) identification principles, guidance and practices have resulted in “largely bureaucratic” processes that do not ensure that identity fraud is effectively prevented. Were strict identification requirements to be imposed everywhere and in all circumstances, though, there would be an even more negative impact on financial inclusion because of the barriers that Lisa referred to.

Surely it’s time for a rethink.

We erect (expensive) KYC barriers and then force institutions to conduct (expensive) AML operations, using computers and laser beams to emulate handwritten index cards and suspicious transaction reports (STRs). But as I have suggested before, suppose the KYC barriers were a lot lower so that more transactions entered the financial system. And suppose the transaction data was fed, perhaps in a pseudonymised form, to a central AML factory, where AI and big data, rather than clerks and STR forms, formed the front line rather than the (duplicated) ranks of footsoldiers in every institution. In this approach, the more data fed in then the more effective the factory would be at learning and spotting the bad boys at work. Network analysis, pattern analysis and other techniques would be very effective because of analysis of transactions occurring over time and involving a set of (not obviously) related real-world entities.

I think we need to plan for a new form of CDD for the digital age. We all know that COVID-19 is accelerating the evolution of digital onboarding, and that’s great. But we need to move to the next level. I call this Digital Due Diligence (DDD) and now that we live in a world where digital identity is becoming a thing (both for people and for organisations) it’s time to plan for a faster, more cost-effective and more transparent approach that is based on the world we are actually living in.

China moves forward with CBDC

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

DCEP phone

with the kind permission of Matthew Graham @mattysino

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

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

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

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

DCEP interface

with the kind permission of Matthew Graham @mattysino

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

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

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