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.

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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.

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.

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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.

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.

Digital gold for a digital world?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unbundling

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

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

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

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

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

Rebundling

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

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

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

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

The real “challenger” banking business model is data, not money

I was quoted in The Economist (“Plug and pay”, 21st November 2019) talking about the impending reshaping of the retail financial services sector. Although the quote isn’t quite accurate — I was responding to the statement that a a bank is a balance-sheet, a factory that turns capital into financial products (such as loans and mortgages) and a sales force, I didn’t make the statement — the paraphrase is correct. Those first two activities 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. As noted in article, the Apple credit card is actually issued by Goldman Sachs (although it was Apple that caught the flack in the row about gender discrimination around credit limits) and the Amazon cards are issued by Chase, Synchrony and American Express. Similarly, the Google “checking” account (this is the American word for a current account, because they still use cheques, which must be something to do with the Continental Congress or something) is actually provided by Citi.

Open Banking Basic Options Updated Colour Picture

What big tech wants is the distribution side of the business, as shown in this old diagram of mine. They have no legacy infrastructure (eg, branches) so their costs are lower, but to my mind more importantly the provision of financial services will keep customers within their ecosystems. If you use the Google checking account and Google pay then Google will have a very accurate picture of your finances. As the article says “Amazon wants payments in-house so users never leave its app”. Indeed.

The business model here is very clear. What Big Tech wants isn’t your money (the margins on payments are going down) but your data. That’s why when people talk about “challengers” they should really be talking about Microsoft and not Monzo.

This is where there are some pretty serious implications. If Big Tech takes over consumer relationships, banks will end up having to give away margin but, far more seriously, data. Andrei Brasoveanu of Accel, a venture-capital firm, is quoted as saying that they could turn into “utilities, providing low-margin financial plumbing”. Well, that’s the lucky ones. The unlucky ones will be wiped out in a wave of consolidation and closures.

This isn’t a technology prediction, by the way. In Europe at least it is a regulatory prediction. Back in 2016, I wrote about regulators demanding that banks open up their APIs that “if this argument applies to banks, that they are required to open up their APIs because they have a special responsibility to society, then why shouldn’t this principle also apply to Facebook?”. My point was, I thought, rather obvious. If  regulators think that banks hoarding of customers’ data gives them an unfair advantage in the marketplace and undermines competition then why isn’t it true for other organisations in general and the “internet giants” in particular? This same point was just made by Ana Botin, Chairperson of Santander. My good friend Chris Skinner notes her comments to Bloomberg: “I need to know you and that’s based on data. Why should data be regulated in a different way if you’re called a bank and if you’re called something else”.

There are big changes coming, and banks and payment companies in particular are going to need effective strategies to survive. It’s not only a problem for those legacy incumbent dinosaurs that the happening new digital kids like to poke fun at. The fintech “challengers” also have a problem. Just as Big Tech has made ecosystems impervious to competition, so it could cross-subsidise (with data as well as with money) its financial services products to raise such a barrier to competition that no newcomer will be able to spend enough to gain traction.

There are some really big changes coming in retail financial services. And that’s not a prediction, that’s a fact.

Where’s “Sign in with Barclays”?

In my keynote speech at KnowID 2019 in Las Vegas, I said that we needed think about the big picture around digital identity. I said that digital identity should be seen as a fundamental defence in the cyberwar that we are already in and that has no imaginable end. It’s possible that some of the people in the audience felt that I was being hyperbolic and that this piece of conference rhetoric was for entertainment purposes only. In which case I must refer them to the recent comments of General Sir Nick Carter, Britain’s Chief of the Defence Staff, who said that our nation is “at war every day” due to constant cyberattacks. Even more interestingly, he then went on to say in the modern world there is no longer a distinction between war and peace (my emphasis).

This is precisely as the great media theorist Marshall McLuhan predicted. Indeed, I quoted him in my speech. In Culture is our Business, written nearly 50 years ago, he said that “World War III is a guerrilla information war with no division between military and civilian participation”. This is why we need to take digital identity seriously, as strategic infrastructure and as matter of national urgency. It’s not about making it easier for people to log in to The Daily Telegraph or Woking Council, although that should surely be a by-product of a well-designed system, it’s about keeping our people, our institutions and our democracy safe.

(I saw Paul Chichester, the Director of Operations at the UK National Cyber Security Centre, speaking about this at the P20 conference in London. In addition to telling the delegates that “cybercrime paid for that North Korean submarine launch”, he observed that it is the centenary of the Government Communications Headquarters (GCHQ) and that they have special exhibition about this over at the Science Museum. Since I spent formative time in my career working on secure networks for GCHQ, I’m really looking forward taking at look at this when I’m in London next!)

So what should we do?

I don’t think the answer for us it to build a centralised identity service (such as Aadhar in India) or a centralised reputation management system (such as China’s social credit score). I think we need to think about more sophisticated and more flexible federated options. I think we should start building an identity infrastructure for the modern world and that we should probably start with the banks. Citi put out a paper about this last month: it’s called “The Age of Consent” and it discusses the idea of a federated financial sector solution, something along the line of the Scandinavian bank ID services. (I contributed to the paper.)

You can see the author, Tony McLaughlin of Citi, talking about it here on Finextra TV saying that “if we fix digital identity, we fix payments”, and he’s got a point. Banks have an obvious and significant interest in creating the new infrastructure because it’s good for banks. But it’s also good for everyone else, so it’s not only a way for banks to save money, it’s also a way for banks to create new products and services that mean new revenue streams. In fact, it could be that digital identity is not simply an additional revenue stream in the future but that identity is bigger than payments to banks. You can watch Alessandro Baroni, CMO of equensWorldline, saying just this today on another Finextra TV interview.

In the UK, it is time for the regulators to demand action from the banks. When I was last asked to log in to a web site to buy something (last weekend) I was presented with the option to “Log in with Amazon” and “Log in with Facebook” but no option to “Log in with your safe and trusted bank digital identity that is part of a regulatory framework designed to protect you and your personal information and comes with expectations of redress, ombudsman, accountability and, ultimately, a physical presence to resolve issues”. Why not?

SIBOS, Star Trek and the end of Bretton Woods

Here’s a story I came across that I found so interesting that I discussed it in my book about the history and future of money, “Before Babylon, Beyond Bitcoin”. It is a utopian future fiction that happens to have something to interesting to say about money, which is why it caught my eye. This is somewhat unusual for a utopian vision since, as Nigel Dodd observed in his 2014 book “The Social Life of Money“, utopias from Plato’s Republic to Star Trek don’t seem to include money at all, never mind M-PESA or Bitcoin.

Anyhow, the story that interested me has a ‘guy falls asleep under hypnosis and awakes a century later to find a model society, then finds it’s all a dream’ narrative arc that is hard to read with modern eyes, because the perfect society that the author imagines is a communist superstate that looks like Disneyland but run by Stalin. Everyone works for the government, and since government planners can optimize production, the ‘inefficiency’ of the free market is gone.

During his adventures in this new world the narrator, the time travelling protagonist, is told by his host in the modern era (the good Doctor Edward Leete), that cash no longer exists. Instead, the Doctor informs him, the populace use ‘credit cards’ for retail transactions. (He then, as it happens, goes on to describe what are in fact offline pre-authorized debit cards imagined in the technology of the day, but that is by-the-by.)

While the author does not talk about the telephone, laser beams or the knowledge economy, he does make a some insightful predictions about the evolution of money. When talking about an American going to visit Berlin, the good Doctor notes how convenient it is for international travellers to use these ‘credit cards’ instead of foreign currency: ‘An American credit card,’ replied Dr Leete, ‘is just as good as American gold used to be’.

This is an excellent description of our world after the end of the gold standard and the rise of a dominant reserve currency, what economists call the  “Bretton Woods II” era of monetary history. A clever prediction indeed. However, I think that the most fascinating insight into the future of money comes later in the book, when the time traveller asks his twenty-first-century host ‘Are credit cards issued to the women just as to the men?’ and the answer comes back ‘certainly’.

That answer might alert you to the age of the text, which in fact contains the earliest mention of a credit card that I have found anywhere as part of a fictional narrative. The book is by the American author Edward Bellamy and is called “Looking Backward, 2000–1887“. It was written in 1886, a century before the credit card became the iconic representation modern money, and it was one of the best-selling books of its day. I had a 1940s edition in front of me as I wrote my book, so it was still being reprinted sixty years later!

I cannot help but reflect that the discourse on money in that book is a wonderful example of how science fiction is not really about the future at all but about the present: the retort ‘certainly’ is clearly intended to surprise the Victorian reader as much, if not more, than the his prediction of glass tunnels that surround pavements when it rains.  It took a writer, not an economist or a technologist, to ask a simple question about money and get a surprising answer. Hold that thought.

Predictions are hard, especially about the future of money

Now let us have a go at predicting the financial system half a century onwards. Where do we start? Well, a good rule of thumb for futurologists is that if you want to look 50 years forward, you need to look at hundred years back because of the increasing pace of change. A hundred years back we had the telephone and global markets connected by instant, global communications. We had the Bank of England and the Federal Reserve. We had wire transfers. We had the world’s first commercial aviation service, created as it happened to accelerate the clearing of cheques between Chicago and New York.

A century ago we were also coming to the end of the era of the classical gold standard. The demise of that global financial system was brought about by the pressures of global conflict and depression that ultimately led Britain to abandon it permanently in 1931 after a temporary suspension that began in the middle of First World War and lasted until 1925. Some people think we are now coming to the end of the Bretton Woods II era and, as The Economist observed recently (“Into the woods”, 17th August), saying that international trade is complicated because “most countries have their own currencies, which move in idiosyncratic ways and can be held down to boost competitiveness”, it is not at all clear what is coming next!

If this is correct, and it seems likely that it is, then then what will replace the IMF, central banks and commercial banks offering credit when it comes to creating money, facilitating payments and prosperity? The reaction of regulators around the world to one alternative, Facebook’s proposed “Libra” digital currency, seems to indicate that the incumbents are not going to give up with out a fight. Yet given the history of financial markets and institutions, and given that we know that change is inevitable as the structures reshape under social, regulatory and technological pressures, it is not good enough to simply say that the incumbents are wrong. We (ie, the financial industry) must help to create a vision of future banking that helps us all – and I include the regulators in this – to shape strategies that lead to a financial sector that serves society better.

But what vision?

If we set aside both the misplaced view that the status quo will prevail and the Bitcoin maximalists fantasies of a completely decentralised society, where do we look to find believable alternatives? We all hear the speeches of the regulators, read the annual reports from the bankers, see the demos of the technologists and the slide decks of entrepreneurs. But have any of these created a vision in your mind? Perhaps it’s time to return to my opening observations to develop a narrative just as surprising to contemporary audiences Bellamy’s was to a Victorian one.

So. What do we now see a couple of generations from now. The world of Star Wars with a “galactic credit” that is universally accepted. That doesn’t seem right to me. A single currency doesn’t really work between Germany and Greece, so how it would work between Earth and LV-426? Would the use of a Synthetic Hegemonic Currency (SHC), to use Mark Carney’s words in the Financial Times (“Mark Carney calls for global monetary system to replace dollar”, 23rd August 2019), function in these circumstances as a trade currency for the universe?

 

What about the world of Star Trek with no money at all, save the gold pressed latinum of the Ferengi (shown above), valuable because it’s the only substance that the replicators can’t produce? How about the world of Charles Stross’ “Neptune’s Brood” where there is fast money and slow money that relies on cryptography so it only travels at one-third the speed of light?

How will people transact? Will it be the world in Robert Heinlein’s “Beyond the Horizon” where the government has an “integrated accumulator” (what we would now call a blockchain) to record all transactions and the finance minister has dashboard to see just how the economy is doing? The integrated accumulator sounds very much like the “compubank” in Margaret Attwood’s “The Handmaid’s Tale” which tells what happens if this machinery falls under the influence of fanatics, in that case as theocratic US administration that bans and blocks women’s payment cards? Will cash, indeed, be banned or will it simple be cash as in William Gibson’s “Count Zero” where the protagonist finds himself in a near future where he  “had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff, it was just that no- body ever did anything legitimate with it”. (Which, frankly, sounds like Sweden rather than some future dystopia.)

What if money as we know it vanishes as a transactional medium of exchange? Will it be the world of Bruce Sterling’s “Distraction” in which distributed servers manage reputation as a currency, a theme also present in Cory Doctorow’s “Down and Out in the Magic Kingdom”. I am naturally attracted to these images of a future in which identity, trust and reputation reconnect us with our neolithic heritage (indeed, a few years ago I wrote a book called “Identity is the New Money”) and dispense with many kinds of intermediaries! Will this free us or will it fulfil the prophecy of the Book Of Revelation 13:16-17 that “no man might buy of sell save that he has the mark, or the name of the beast, or the number of his name” enslave us? Should we begin our scenario planning for these transactional environments now (hint: yes) or should we leave the technologists to choose a future for us?

Next week, for the Innotribe closing keynote of most important global banking conference of the year SIBOS, my good friend Brett King and I will be looking how writers have thought about the future of payments, banking and money to see if their narratives can help us to formulate strategies in this space and to see if we can find the hard question and surprising answer for the world of 50 years from now. I have an idea of what it might be, but let’s see how Brett, me and the Innotrible audience develop our thinking on the day. See you there.

Libra and Calibra… Tired: KYC. Wired: KYZ.

As Ed Conway noted in The Times recently, Mark Zuckerberg once observed that “in a lot of ways, Facebook is more like a government than a traditional company”. Indeed it is. And in fact it just got a lot more like a government. Companies have loyalty points, but governments have currencies, which are like loyalty points but with standing armies. You can hardly have failed to notice that Mr. Zuckerberg’s highly successful advertising company Facebook is now planning to have a currency of its own. 

The currency is called Libra and the media has been full of commentary about it the new blockchain that will support it (created by the Libra Network) and the new wallets that it will be stored in (created by Calibra, a Facebook subsidiary). Whatever you think about Facebook, or social media in general, or Bitcoin and its ilk, there’s no getting around that this is a big deal and it was unsurprising that it attracted such wide media coverage.

Now, putting to one side whether it is a currency or not or a blockchain or not (Central Banking magazine said that it’s “neither a true currency nor bearing all the hallmarks of a typical crypto asset, Libra will run on a system similar to a blockchain”) and actually I kind of agree with the economist Taylor Nelms that “the crypto angle does seem like a sideshow”,  the fact that it exists is nonetheless rather interesting, although not necessarily for reasons that are anything to do with money although it is a payment system of a potentially large scale, as I will explain later.

What is the purpose of this new payment system though? Libra says that hope to offer services such as “paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass”. But as numerous internet commentators have pointed out, if you live in London or Nairobi or Beijing or Sydney you can already do all of these things. It’s only in San Francisco where such things appear to be special effects from Bladerunner, an incredible vision of a future where people don’t write cheques to pay their rent and can ride the bus without a pocket full of quarters.

Nevertheless, I’ve written before that a Facebook payment system would be beneficial and I stand by that. The ability to send money around on the internet is clearly useful and there are all sorts of new products and services that it might support. A currency, however, has more far reaching implications. As the brilliant J.P. Koenig points out, Libra is more than a means of exchange. The Libra “will be similar to other unit of account baskets like the IMF’s special drawing right (SDR), the Asian Monetary Unit (AMU), or the European Currency Unit (ECU), the predecessor to the euro” in that it is a kind of currency board where each of  units is a “cocktail” of other currency units. This should, unlike Bitcoin, provide a reasonably stable currency for international trade.

This has significant implications. What if, for example, the inhabitants of some countries abandon their failing inflationary fiat currency and begin to use Libra instead? The ability of central banks to manage the economy would then surely be subverted and this must have political implication. This has not gone unnoticed by the people who understand such things, an example being Mark Carney, quoted in the Financial Times saying that if Libra does become successful then “it would instantly become systemic and will have to be subject to the highest standards of regulation”. Unsurprisingly,  both the international Financial Stability Board and the UK’s Financial Conduct Authority have said they will not allow the world’s largest social network to launch its planned digital currency without “close scrutiny“.

Yes, But…

So there are all kinds of reasons to be sceptical about whether Libra will ever launch and whether it will reach any of the goals set out by its founders. And yet…

There’s something interesting in Libra. I’ve long written about the inevitability of new technology being used for new payments systems that will in turn be used to create new forms of money. More than two decades ago I wrote about the advent of private currencies and I covered the nature of corporate currencies more recently (and in some detail) in my book “Before Babylon, Beyond Bitcoin”.

(Although I have to note than in my “5Cs” taxonomy of the future of money, I would classify Libra as a community currency rather than a corporate currency, but that’s not the point of this discussion.)

Now, using the model that I set out in the book to help general business readers understand what the likely trajectory of digital assets will be, I look at the two institutional bindings needed to turn the cryptographic level o. These are the binding of values on the ledger to real-world assets and the binding of the wallets to real-word entities.

Digital and Crypto Layers Revised Colour Pic

 

The binding of a wallet address to an actual person is difficult and costly. Here’s what Calibra say about it: “Calibra will ensure compliance with AML/CFT requirements and best practices when it comes to
identifying Calibra customers (know your customer [KYC] requirements) by taking the following steps

  • Require ID verification (documentary and non-documentary).

  • Conduct due diligence on customers commensurate with their risk profile.

  • Apply the latest technologies and techniques, such as machine learning, to enhance our KYC and
    AML/CFT program.

  • Report suspicious activity to designated jurisdictional authorities.”

I thought it was worth reproducing this in full.  So if  we put together what the Libra white paper says with what Calibra say about their wallet, you get this specific version of the model from my book. I think it describes the overall proposition quite well.

Digital and Crypto Layers in Colour with Libra pic

All well and good. Now, while I was reading through the Libra description, I didn’t find anything remarkable. Until the last part. On page nine of the Libra white paper, just at the very end, I notice that “an additional goal of the association is to develop and promote an open identity standard. We believe that a decentralized and portable digital identity is a prerequisite to financial inclusion and competition”.

Well, well. An “open identity standard”.

Identity is at the heart of the proposition, if you ask me. One one first questions that Congress had for the Libra hearing with David Marcus was “how parties will ensure that the user or beneficial owner of a currency or wallet is accurately identified”. Now, you can’t know who the beneficial owner of the currency is any more than you can know who the beneficial owner of a $100 bill is, but you can know who the owner of a wallet is. This question has already been answered, by the way. Kevin Weil, Facebook’s VP of product for Calibra was clear that users will  have to “submit government-issued ID to buy Libra” as you would expect. People without IDs will still be able to buy Libra through third-party vendors, of course, but that’s a different point.

Put a pin in “government-issued ID” as we’ll come back to it later.

Its clear that the wallet addresses in a transaction (as shown in my diagram above), a timestamp and the transaction amount will be public because they are on a shared ledger, but as Facebook have made clear, any KYC/AML (ie, the binding shown in my diagram above) will be stored by the wallet providers, including Calibra. Since, as David Marcus has repeatedly pointed out, Libra is open and anyone will be able to connect to the network and create a wallet, there could be many, many wallets. But you’d have to suspect that Facebook’s own Calibra will be in pole position in the race for population scale. Hence Calibra’s approach to identity is really, really, important.

Now, if Calibra provides a standard way to convert a variety of government-issued IDs into a standard, interoperable ID then that will be of great value. Lots of other people (eg, banks) may well want to use the same standard. In the UK, for example, this would be a way to deliver the new Digital Identity Unit (DIU) goal set out by the Minister for Implementation, Oliver Dowden, of one login for your bank and your pension. But it isn’t only the ID that needs interoperability, it’s the credentials that go with it. This is how your build a reputation economy. Your Calibra wallet can store your IS_OVER_18 credential, your Uber rating and your airline loyalty card in such a way as to make them useful. Now, if you want to register for a dating side, you can log in using Calibra and it will automatically either present the relevant credential or tell you how to get it from a Libra partner (eg, MasterCard).

It seems to me that this may, in time, turn out to be the most important aspect of the “Facebucks” (as I cannot resist calling it) initiative. What if a Calibra wallet turns out to be a crucial asset for many of the world’s population not because it contains money but because it contains identity?

Government Issue

Now back to that idea of a government-issued ID. One of the other things that governments do is issue a passports as a form of formal identity. If I obtain a Calibra wallet by presenting my passport, that’s fine. But suppose I live in a developing country and I have no passport or formal ID of any kind?

Well I think Facebook can make a good argument that your Facebook profile is a more than adequate substitute, especially for the purposes of law enforcement. After all, Facebook knows who I message, my WhatsApp address book, who I hang out with, where I go… Facebook can tell real profiles from fake and they kill off fake “identities” all the time. My guess is that if you have had a Facebook profile for (let’s say) a year, then that identity is more than good enough to be able to open an account to hold Libra up to $10,000 or so and, frankly, it’s beneficial for society as a whole to get those transactions on to an immutable shared ledger.

Frankly, in large part of the world Know-Your-Customer (KYC) could be replaced by Known-bY-Zuck (KYZ) to the great benefit of society as a whole.