Tokens, tokens everywhere

You don’t have to be a cryptocurrency believer to think that the underlying technology of cryptocurrencies (value transfer without an intermediary, with double-spending prevented through distributed consensus) is going to change the financial sector. Indeed, the use of that underlying technology may well mean that cryptocurrencies in their current form are never needed, because more general digital asset transfer platforms will supplant them. These platforms, which enable the exchange of digital assets without clearing or settlement (let’s call these digital assets “tokens” for short), have real potential.

I wrote in my book “Before Babylon, Beyond Blockchain” back in 2017 that tokens may make a real difference to the way the economy works and the subsequent evolution of the cryptocurrency world has reinforced my view. Not that my opinion counts for much. But the opinion of Jay Clayton, the chairman of the U.S. Securities and Exchange Commission (SEC), counts for a lot more and he is saying the same thing: in time, everything will be tokenised.

When the current craziness is past and digital asset tokens have become a well-regulated but wholly new kind of digital asset, a cross between corporate paper and a loyalty scheme, they will present an opportunity to remake markets in a new and better way. 

It’s a view that is supported not only by wide-eyed techno-utopian hype-merchants (eg, me) but by the sensible, forward-looking and rational financial sector leaders. I remember interviewing Jonathan Larsen (chief innovation officer of Ping An Group and head of the Ping An Global Voyager Fund) on stage at Money20/20 Asia. He told me that “Tokenization is a really massive trend… a much bigger story that cryptocurrencies, initial coin offerings (ICOs), and even blockchain” and confirmed my suspicion that long-term planning in the financial services sector must include some radically different scenarios. Jonathan spoke eloquently about the characteristics of the new asset class (including fractionalisation, which fascinates me) but went on to talk about the key characteristics of a digital asset platform that can fundamentally change the way the world of finance works: “transparency and universal access and the ability to reduce frictional costs”. I see this as a way to more efficient and liquid markets, and I am hardly alone in this.

Digital assets that are bound to “real world” value by regulated institution present not only the mechanism for a different financial sector but an innovative approach to a better financial sector. A sector that serves wider society more effectively and attacks the stubbornly high cost of financial intermediation in a modern economy. In a speech, Banque de France first deputy governor Denis Beau touched on inefficiencies in the sector and said that tokenisation could be a way to “answer the market’s demands”. I agree, obviously.

At the World Economic Forum this year, there was a discussion about what assets might be tokenised, with examples ranging from property to owning a fraction of a piece of art by Andy Warhol, although the ones that attracted the most discussion were enabling farmers in emerging markets to raise finance by selling future crop yields and sports stars selling the rights to their future income. I can foresee a rich and varied marketplace. Some tokens will be assets, and fractional ownership of assets. Some tokens will be claims on future products and services. Some tokens will be the currencies of communities.Who knows which of these might become a real markets, but one candidate for a successful token class (for which there appears to be real demand) is central bank digital currency (CBDC).


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

Don’t Listen to Me

Now, when people like me or the head of Ping An VC fund or a deputy governor of the French central bank talk about the inevitability of tokenisation, that’s one thing. But when Jay Clayton said at the beginning of October that while there were once stock certificates, today there are database entries representing stocks and “it may be very well the case that those all become tokenized” (my italics), I think it’s time to begin some serious planning for a reformed financial sector that is more efficient, more effective in serving the wider economy and more resistant to bad behaviour of all kinds.

That last point is important. Jonathan’s mention of transparency highlights one of the key reasons that we should all want to see this kind of financial sector. Look at some of the recent problems in the world of finance, such as the collapse of Wirecard. Corporate accounts included assets that simply did not exist. Since auditors and the regulators and the board were unable to prevent criminality on a grand scale here, it is reasonable to ask whether technology might be able to do better job. Well, I think the answer is yes, and I think tokenisation is part of consistent vision of just how it might do so: if I claim to own one-thousandth of the Mona Lisa it is easy for you to check on the digital asset platform to see that the token representing one-thousandth of the Mona Lisa is in my wallet.

Thus, while the tokenisation of financial assets and the creation of what I heard Jeremy Allaire of Circle call the “long tail” of capital markets is a much broader topic than CBDC its apparent inevitability means we should begin to explore this concept of CBDC as simply one kind of a more generalised digital asset, albeit one that is bound to risk-free central bank money. Even that most conservative of organisations, the Association of German Banks, says that in order to “maintain Europe’s competitiveness, satisfy customers’ needs and reduce transaction costs, the introduction of euro-based, programmable digital money should be considered”.

What they refer to a programmable digital money, and what I call smart money, is money built on tokens. In this model of the world, one might imagine using a platform built from cryptocurrency technologies to trade thousands or millions of different tokens, with one form of these tokens being digital currency and one category of token issuers being central banks. This is no crazy cryptomaximalist conjecture but a reasoned and reasonable projection of capitalism’s use of the new technology of value transfer.

Huw van Steenis of UBS, who I take very seriously on these matters because of his work at the Bank of England, says that there will be a “three-horse race” around the future of money with private tokens and CBDCs developing in parallel with efforts to improve the current system (see, for example, SWIFT gpi and the UK’s new payments architecture). This is wise counsel, and there is indeed every possibility of competition between these approaches stimulating innovation in the short-term but then a longer-term convergence as the platforms for exchanging digital asset tokens are used to implement both private tokens and public tokens (including CBDCs).

In this appealing vision of the future, there will be nothing technological to distinguish central bank digital currency from other digital assets that will be functionally equivalent to money, such as corporate currencies. Dollar bills from Bill’s dollars (I never get tired of this trope): one will be tokens backed by risk-free central bank money, the other tokens backed by Microsoft revenues. But they will both be tokens, exchanged without clearing or settlement through the same secure global digital asset platform.

[This is an edited version of a piece that first appeared on, 2nd November 2020.]

PayPal’s Bitcoin strategy is about much more than bitcoin

Given that the people who are great supporters of bitcoin often talk about its key characteristic being that it is person-to-person, uncensorable value transfer you do have to wonder who will be using the new PayPal service that will allow them to pay merchants using the cryptocurrency. My good friend Ron Shevlin drew on a survey of 3,000 US consumers conducted by Cornerstone Advisors and FICO which found that around two-thirds of US smartphone users have the PayPal app installed (as I do), a seventh of all PayPal users already own some form of cryptocurrency and of those PayPal users, half of them used Bitcoin to buy products or services in the past year. So does this mean that the mass market use of cryptocurrency for payments is just around the corner?

I think not. The overwhelming majority of all cryptocurrency transactions are purely speculative and the people who think that bitcoin is a good investment* are never going to use it for payments. Bitcoin was originally billed as an elecronic cash system but most bitcoins aren’t used as currency in transactions for goods and services. Surveys have shown that the majority of bitcoin are held for speculative purposes and while some retailers accept Bitcoin, they see cryptocurrency purchases having a higher drop-out rate than cards and cash payments.


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

So this can’t be much of a payments play. Think about it. If you think that the bitcoin is going to the moon (and will be worth $1 million each within five years, as this former Goldman Sachs hedge fund person has just predicted) then why would you waste even a tiny fraction of a bitcoin buying the pizza or a Pez dispenser? No, the people who will use their PayPal wallet to exchange bank dollars for PayPal bitcoin are simply investing. If they choose to pay a merchant using bitcoin from their wallet, PayPal gives the merchant dollars anyway. Neither the consumer nor the merchant ever has any actual bitcoins in their possession.

When people do use bitcoin to buy things it tends to be things they can't buy using PayPal anyway. Click To Tweet

The amount of cryptocurrency spent on “dark markets” rose two-thirds to reach a new high in the final quarter of 2019, according to Chainalysis and the New York Times says that this data is likely to understate the number transactions for illegal purposes because the company cannot identify all activities relating to drugs, ransomware, tax evasion and money laundering. If I use bitcoin to buy illegal drugs, example, because of its “anonymity” and uncensorability, then I am hardly likely to start buying drugs using PayPal. The example of adult services makes this point rather well. Adult performers who are engaged in a perfectly legal business complain that PayPal refuses to allow payments to them and so they are forced to use third-parties who, according to the New York Times, take anywhere from a third to four-fifths of performers earnings in fees. Those people still won’t be able to use PayPal, whether in dollar or bitcoin, so the new service won’t make any difference to them.

PayPal’s Big Picture

Well, since the people who run PayPal are much richer and much smarter than I am, I am forced to conclude that they must have a plan that goes beyond earning some spreads from buying and selling cryptocurrency for retail speculators. I have no knowledge what PayPal are doing or why, but I do have some experience looking at strategies for financial institutions exploiting new technology, so I think I can make some informed guesses.

First of all, PayPal’s move is to be admired purely in marketing terms. The announcement put five percent on their stock price and garnered gazillions of column inches, links and commentary such as this. Even if they never turn a profit on bitcoin itself, their investment in software and licences has already paid off. I worked on a project for a global financial services financial services organisation a couple of years ago and I can remember the calculations around brand and exposure. To old-timers like me, PayPal is the grandparent of fintech, an upstart storming the walls of the entrenched incumbent financial services giants. But to youngsters, such as the son who I just asked about the company, PayPal are part of the establishment, no different to Wells Fargo or Barclaycard. A bit of cryptocurrency glitter does not hurt the brand, even if it is cosmetic.

Secondly, the technologies of cryptocurrency (shared ledgers, cryptographic proofs and so on) are going to be the foundations of a longer term shift to the trading of digital bearer instruments that are exchanged without clearing or settlement networks so building up institutional expertise is valuable. It’s reasonable to imagine that these instruments might well be implemented as tokens traded across decentralised networks, so exploring the trade-offs around infrastructures and interfaces is a good investment of time and effort.

Thirdly, and much more importantly though, I suspect that PayPal are making two much more strategic and long-term plays around the wallet and its contents. They are no doubt looking enviously across the water to the Asian “super apps” and thinking about the impending Alipay IPO. Turning PayPal from being a repository of balances to fund payments into a financial hub managing a number of different assets for a broad range of consumers is attractive to them. In their scenario planning, PayPal undoubtably started to think about the opportunities that will arise from the trading and management of digital assets (in the form of tokens) in the not-too-distant future. By gaining expertise in decentralised alternatives to commercial bank money and the regulation that does with them, PayPal is being very smart.

I don’t think PayPal’s experiment with bitcoin is really much about bitcoin at all. I think this is a measured and intelligent step towards the transactional environments of the future where digital assets compete with digital fiat across a payments landscape that is utterly different to that of today. As Ajit Tripathi pointed out, crypto-believers might feel they have occupied Wall Street but the reverse is true. Banks (and their regulators) have won and some of these interesting new digital assets are on their way to becoming part of the financial mainstream.

There is one particular category of digital asset that is inevitable: Central Bank Digital Currency (CBDC). In the run-up to the biggest IPO in history, Jack Ma talked about how digital currencies may play an important role in building the type of a financial system that will be needed for the coming generation and said that digital currency could “create value and we should think about how to establish a new type of financial system through digital currency”. Just as the Chinese government have begun to distribute their digital currency through third parties, including commercial banks and apps, so PayPal might reasonably expect to be an invaluable partner to the US government when it finally gets its act together to deliver some sort of digital dollar. If PayPal were to pivot away from the traditional infrastructure of banks and accounts, payments cards and interchange towards an infrastructure of wallets exchanging digital dollars (or perhaps, as Meltem Demirors speculates from a very well-informed perspective, their own alternative to Facebook’s Libra private currency) that would be a significant shift in the dynamics of the payments sector.

* I am not saying that I do or do not think cryptocurrency is a good investment. I am not making any comments that might be misconstrued as financial advice. Please note that any comments I make about cryptocurrencies as an asset class are for entertainment purposes only.

[This is an edited version of a piece that first appeared on, 25th October 2020.]

Helicopter money (and Hitler)

Pressure groups, reformers and economists (such as Positive Money) have long argued that “Helicopter Money”, a term coined by Milton Friedman in his 1969 work “The Quantity Theory of Money” (although to be fair Hitler had had the same idea a generation before so I don’t know why they don’t call it Heinkel Money), is better than Quantitative Easing (QE) in circumstances of disaster and distress. Their argument is that instead of pumping money into financial markets (as central banks did with QE in response to the Great Financial Crisis of 2008), it would stimulate the real economy by transferring money directly to citizens.

As I wrote in Financial World magazine, the traditional financial system is of course an option. Instant cash handouts work well in an economy where everyone has a bank account (let’s say Denmark, for example, where 99.92% of the population over 15 has one) and some form of widely-accepted digital identity (let’s say Denmark, where 92% of the population over 15 has one) it’s quite straightforward. The central bank harvests from the magic money tree and sends the fruit to the commercial banks, the commercial banks add it to the accounts of individuals who register for it with their digital IDs (as in “I am Dave Birch and I claim my £5”). And for the the few remaining people who feel that they have missed out on the free cash, well, they can go to a Post Office or whatever. But what if you are in a country where not everyone has a bank account? The UK, for example, where the Financial Inclusion Commission reckons that there are one-and-a-half million adults without a bank account (and the World Bank puts us in the world top ten for banking inclusion!). Only half of them actually want a bank account although I suppose they might be persuaded to get one for the purposes of receiving a stimulus payment.

It can’t go on like this.

When the next pandemic arrives, things will be different. Or at least they will be different in some countries. The ones with digital currency. In report on digital currency for the CSFI, back in April, I wrote that central banks have long considered it a key advantage of digital currency that it adds to their policy toolkit in interesting ways. It removes the zero-lower bound on interest rates, increases economic activity (the Bank of England Staff Working Paper No. 605 by John Barrdear and Michael Kumhof, “The macroeconomics of central bank issued digital currencies” estimated that substituting only a third of the cash in circulation by digital currency would raise GDP by 3%) and, of course, enables helicopter money. If every citizen has an electronic wallet, then sending electronic cash over the airwaves and directly into those wallets becomes simple.

One of the unexpected consequences of the COVID crisis and the international response to it may well be to accelerate the transition to digital currency. Click To Tweet

One of the unexpected consequences of the COVID crisis and the international response to it may therefore be to accelerate the transition to digital currency that can be delivered directly to citizens. This may have seemed the province of Bitcoin fans until quite recently. However, in the Spring the People’s Bank of China began testing their “DC/EP” system (it stands for Digital Currency/Electronic Payment) in four cities: Shenzen, Chengdu, Suzhou and Xiong’an. The uses will vary, but we already know that in Suzhou, the pilot began in May by paying half of the travel subsidies given to public sector workers as digital currency.

DCEP phone

with the kind permission of Matthew Graham @mattysino

At the virtual SIBOS 2020, PBOC’s deputy governor Fan Yifei said that by late August, the bank had already processed more than three million DC/EP transactions worth some $160+ million, with over  6,700 pilot use cases implemented. He went on to say that “113,300 personal digital wallets and 8,859 corporate digital wallets have been opened”.

Lets hope the Bank of England don’t take this laying down. When the next pandemic rolls in, Andrew Bailey should be able to juggle his spreadsheets and have the stimulus Sterling in our pockets like greased lightning, no helicopter (or commercial banks) needed.

Me with patriotic cushion

Hitler’s plan for Helicopter Money failed.

If you are curious about Hitler’s plan for helicopter money, by the way, the story is told in the brilliant film “The Counterfeiters”, which won the 2007 Oscar for best foreign film. It is the true story of Operation Bernhard, which was the name of that Nazi plan to devastate the British economy by printing money. The idea, conceived at the very start of the Second World War, was to drop worthless counterfeit banknotes over England, thus causing economic instability, inflation and recession.

The film is based on a memoir written by Adolf Burger, a Jewish Slovak typographer who was imprisoned in 1942 for forging baptismal certificates to save Jews from deportation. The Nazis took Burger and more than a hundred other Jews from a variety of trades — printing, engraving and at least one convicted master counterfeiter, Salomon Smolianoff — and moved them from different death camps to a special unit: “Block 19” in Sachsenhausen concentration camp. There they set about forging first the British and then the American currency.

(The BBC produced a comedy drama series based on Operation Berhard in the early 1980s, “Private Schulz”. The characters were based on the real inmates of Sachsenhausen, where 30,000 people were murdered during the course of the war.)

In the end, the prisoners forged around £132 million, which is about five billion dollars in today’s prices. The forgeries were perfect, but the Nazi plan probably wouldn’t have worked. They were churning out £5, £10, £20 and £50 notes at a time when the average weekly wage in Britain was a fiver. The Bank of England though were so concerned that should the Sachsenhausen operation switch to lower denominations then there could be trouble. For this reason, it had to make a contigency plan to withdraw the £1 note and the ten shilling note! So British Intelligence asked Waddingtons Games (who made Monopoly) to print five shilling (25p) and two-and-half shilling (12.5p) notes to replace coins instead of its usual game currency money.

These notes were never used and were destroyed at the end of the war, because the Nazis were never able to put their plot into operation. They packed up all the printers’ plates and counterfeit bills into crates which they dumped into Lake Toplitz in Austria, from which they were subsequently retrieved, which is how it is that I have one of the real fakes hanging in my study.

[An edited version of this piece appeared on, 26th July 2020].

No consensus on CBDCs

Earlier this year, Jeff Wilser was kind enough to write an article about me called “The Man Who Forecast a Currency Cold War” for Coindesk in the run-up to the annual Consensus blockchain conference, which is sort of like SIBOS but for blockchainers rather than bankers.

Screenshot 2020 05 18 12 21 20

Consensus Distributed 2020

It is an annual event in New York and, like many other events, it went virtual this year. I took part in the “Money Re-imagined” session with Michael Casey. Mike chatted to former Treasury Secretary Larry Summers (who is on record as saying that the US should invest in improving SWIFT rather than a digital dollar), digital dollar visionary Chris Giancarlo, Dante Disparte of the Libra Foundation and crypto-industry luminaries Joe Lubin and Caitlin Long. I took part in a discussion with Sheila Warren of the World Economic Forum.

Summers too much privacy

Larry Summers said there may be “too much privacy” in payments.

(If you are curious, I used this discussion session as a case study for my new Fintech Writer’s Workshop video series, so do head over to my Youtube channel DaveFlix and take a look.)

Mersch tokens

Yves Mersch talked about using tokens to implement CBDC.

What particularly caught my eye was the contribution of Yves Mersch from the European Central Bank who talked about the idea of using tokens to implement a Central Bank Digital Currency (CBDC). When I first wrote about this a few years ago, it was probably seen as something out of left-field but by the time I gave a talk about it at the Blockchain Innovation Conference in 2018 it had become if not mainstream, exactly, certainly a topic for discussion in polite society, so it was very interesting to see such a well-informed “insider” talk about this approach.

More likely are the use-cases that don’t even exist today and can’t exist without smart money Click To Tweet

Anyway, the reason that was thinking about Yves’ comments was that Martin Walker, Director of Banking and Finance at the Center for Evidence-Based Management wrote a great piece exploring these issues for the LSE Business Review. He reflects on the idea of using some form shared ledger, digital asset tokens and “smart” “contracts” to implement a digital currency, what I referred to in my book “Before Babylon, Beyond Bitcoin” as smart money, and quotes Robert Sams points on the potential for innovation: “More likely are the use-cases that don’t even exist today and can’t exist without [smart money]”. I am very sympathetic to this view and can’t help but feel that this is where we should focus. Walker goes on to observe that while there probably is scope to “create more mechanisms for adding more conditionality in the financial system, locking up funds until an event happens or creating more easily accessible escrow arrangements” it is not obvious that autonomous consensus applications are the best way forward. Indeed, the early lessons learned from the world of “decentralised finance” (or “DeFi”) suggest that there’s a lot of work to be done to bring working, population-scale schemes to fruition.

I think Martin’s words of caution are entirely justified but along with Yves, I also think that the concepts should be explored. Yes, we could implement digital currency without tokens, but if we are going to create digital currency, then surely we want it to be a platform for new products and services, designed for the economy to come and not simply an mimetic electronic echo of what we already have?

Who needs a digital currency when you have a Coin Task Force?

Well, anyone interested in money or technology or the future will have been following the evolution of Central Bank Digital Currency (CBDC) in China, where the largest state-owned banks have begun testing the “electronic wallet” component of the digital yuan. The tests are being conducted in cities including Shenzhen, which borders Hong Kong. Meanwhile, in America, there’s a Coin Task Force. And it’s been busy urging patriots to return their spare change to circulation by using it for retail transactions because there’s shortage. According to NPR, “Banks and laundromats are scrambling. Arcades and gumball machine operators are bracing for the worst”. Other sectors are adopting a more European approach (where rounding is common) and some stores are rounding their prices to even dollars or (as is common in London) just giving up on cash completely. But why? Where have the coins gone? The shops have none left and customers can’t be bothered to search down the back of the furniture to find them. Banks, lacking the usual coin deposits from the public, requested coins from the Mint which was unable to produce enough coins (and, in fact, fell short of its usual levels)  and… there’s a coin shortage.

America’s coin shortage isn’t a problem, it’s an opportunity to take a step forward. Click To Tweet

In developed economies, this sort of thing doesn’t matter. In Australia, for example, tens of millions of coins may never even go into circulation because their Mint has seen “virtually no demand” for coins in 2020 as physical retail closed down. Same in the UK. Even if there was a coin shortage, most people would never notice since pandemic-accelerated cashlessness is pervasive. Everything I want to buy, I can buy with Apple Pay. I never take a wallet out of the house with me, let alone coins.

Problems are opportunities

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

Frankly, the continued use of pennies and even nickels baffles me. There’s something that economists call “the big problem of small change”. If you’re interested, there’s a very good book about this, which is called “The Big Problem of Small Change”. In essence, the problem is it’s hard to make a living out of producing small change, so no-one does it, so therefore the government has to do it and bear the cost in the interests of the economy.  But should they continue to do this in a world of contactless card and QR codes? The US Mint lost 0.99 cents on each penny it sold in 2019 but continued to produce more pennies than any other coin in circulation!

The Cato Institute says that the case for producing these pointless coins is weak and they they are only minted because lobbyists harness nostalgia and “junk arguments” about rounding.  If you are interested in the subject of rounding, there is a very good paper on rounding written by Robert Whaples called “Time to Eliminate the Penny from the U.S. Coinage System: New Evidence” that was published in the Eastern Economic Journal way back in 2007. This confirms the European experience that dumping low-value coins and rounding prices is economically neuter. Rounding is not that complicated! Whaples wrote that a detailed study of convenience stores found the final digit of purchases, which usually involves multiple products and sales tax, was pretty much random so that “if you round it to the nearest nickel, the customer wouldn’t get gouged”. Sometime you’d round up, sometimes you’d round down. It balances out.

(Here is how they do it in Belgium where total amount payable in cash has been rounded up or down to the nearest five cents since December 2019: if the total amount payable in cash ends in one or two cents, it is rounded down to zero,  if it ends in three, four, six or seven cents then it is rounded to five cents and if it ends in eight or nine cents then it is rounded up to one euro. As far as I know, Belgian civil society has not collapsed and shops are operating normally under the circumstances.)

Pennies and nickels are scrap metal and a private coin industry would not be able to waste taxpayer cash on subsidising miners to keep producing them. And if you think I’m exaggerating by calling coins “scrap” then you should, as the man says, follow the money. Which in this case goes to China. I remember reading a fascinating news story about this a few years ago, which really set me thinking. The story concerned two Chinese people who were arrested in Denmark after they tried to exchange a hoard of scrap Danish coins that were mistaken for counterfeits. I thought it was a pretty unusual incident and I mentally filed it away to use as a conference anecdote, but then I spotted another similar case in which two Chinese tourists were arrested in France for suspected forgery after trying to pay a hotel bill in coins. The police found 3,700 one-euro coins in their room! The men said they had got the money from scrapyard dealers in China, who often find forgotten euros in cars sent from Europe. This tallied with the Danish story. Sufficiently large amounts of coins from Europe end up as scrap that it makes for a worthwhile enterprise (in China) to collect up these coins and ship them back here to use! Not all the coins coming from China are real though. I remember when the Italian police discovered half a million counterfeit euro coins in a container. Hardly surprising, because if container-loads of coins are coming out of China, then it’s inevitable that this trade will attract counterfeiters. And this gave me an idea.

I don’t know if the US Coin Task Force has been thinking out of the box, but may I suggest that they make a virtue out of necessity. Since the Chinese counterfeiters can presumably produce these coins at a lower cost than collecting them as scrap metal (otherwise they wouldn’t make them, they’d just collect them), why doesn’t the US mint just stop producing coins above face value and sending them for scrap and instead let the Chinese counterfeits circulate in their place? Think about it. It costs the US Mint two cents to make a penny that no-one cares is real or not. So why bother? If the Chinese can produce one for half a cent, ship it to the US in a container and make a profit of 0.2 cents on it, then let them and let the US Mint do something more useful instead: $1 coins. There is no $1 note in Canada, no £1 note in the UK, no €1 note in Europe. There are already more $100 bills in circulation than $1 bills, so let the $1 bill die a long overdue death and replace it with the more cost-effective $1 coin instead. A decade ago, the GAO calculated that the replacement of dollar bills with dollar coins would save an estimated $5.5 billion in costs over a generation. It’s time.

[This is an edited version of an article that first appeared on Forbes, 24th August 2020.]

The great Chinese money experiment is over

The Chinese were first with the great transition from commodity money to paper money. They had the necessary technologies (you can’t have paper money without paper and you can’t do it at scale without printing) and, more importantly, they had the bureaucracy. In 1260, the new Emporer Kublai Khan  determined that it was a burden on commerce and drag on taxation to have all sorts of currencies in use, ranging from copper coins to iron bars, to pearls to salt to gold and silver, so he decided to implement a new currency. The Khan decided to replace metal, commodities, precious jewels and specie with a paper currency. A paper currency! Imagine how crazy that must have sounded!

China and paper money

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

Just as Marco Polo and other medieval travellers returned along the Silk Road breathless with astonishing tales of paper money, so modern commentators (e.g., me) came tumbling off of flights from Shanghai with equally astonishing tales of a land of mobile payments, where paper money is vanishing and consumers pay for everything with smartphones.

China was first in to paper money and eight hundred years later looks like being first out of it. Click To Tweet

This thinking has been evolving for some time. Back in 2016, the Governor of the People’s Bank of China (PBOC), Zhou Xiaochuan, set out the Bank’s thinking about digital currency, saying that it is an irresistible trend that paper money will be replaced by new products and new technologies. He went on to say that as a legal tender, digital currency should be controlled by the central bank and after noting that he thought it would take a decade or so for digital currency to completely replace cash in China, he went to state clearly that the bank was working out “how to gradually phase out paper money”. Rather than simply let the cashless society happen, which may not led to the optimum implementation for society, they were developing a plan for a cashless society.

As I have written before, I don’t think a “cashless society” means a society in which notes and coins are outlawed, but a society in which they are irrelevant. Under this definition the PBOC could easily achieve this goal for China. But how will they do it? I got a window into the tactics when I listened to Kevin C. Desouza (Professor of Business, Technology and Strategy in the School of Management at the QUT Business School, a Nonresident Senior Fellow in the Governance Studies Program at the Brookings Institution and a Distinguished Research Fellow at the China Institute for Urban Governance at Shanghai Jiao Tong University), someone who has pretty informed perspectives. I heard him in conversation with Bonnie S. Glaser (senior adviser for Asia and the director of the China Power Project at the Center for Strategic and International Studies, CSIS) on the ChinaPower PODCAST. Kevin and Bonnie were discussing China’s plan to develop a Central Bank Digital Currency (CBDC). I have looked at China’s CBDC system (the Digital Currency/Electronic Payment, DC/EP) in some detail and have speculated on its impact myself, so naturally I wanted to double-check my views (coming from a more technological background) against Kevin and Bonnie’s informed strategic, foreign policy perspective.

One particular part of their discussion concerned China’s ability to advance in digital currency deployment and use because of the co-ordinated plans of the technology providers, the institutions and the state. The technological possibilities are a spectrum, there are a wide variety of business models and there are many institutional arrangements to investigate, balance and optimise. Take, for example, the specific issue of the relationship between central bank money and commercial bank money. Yao Qian, from the PBOC technology department wrote on the subject in 2017, saying that to “offset the shock” to commercial banks that would come from introducing an independent digital currency system (and to protect the investment made by commercial banks on infrastructure), it would be possible to “incorporate digital currency wallet attributes into the existing commercial bank account system” so that electronic currency and digital currency are managed under the same account.

This rationale is clear and, well, rational. The Chinese central bank wants the efficiencies that come from having a digital currency but also understands the implications of removing the privilege of money creation from the commercial banks. Thus you can see the potential problem with digital currency created by the central bank, even if it is now technologically feasible for them to do so. If commercial banks lose both deposits and the privilege of creating money, then their functionality and role in the economy is much reduced. Whether you think that is a good idea or not, you can see that it’s a big step to take. Hence the PBOC position, reinforced by Fan Yifei, Deputy Governor of the People’s Bank of China writing that the PBOC digital currency should adopt a “double-tier delivery system” which allows commercial banks to distribute digital currency under central bank control. I don’t doubt that this will be the approach adopted by the Federal Reserve when the US eventually decides to issue a digital dollar, which is why we in the West should be studying it and learning from it.

I’m fascinated by China’s long experiment with paper money and its imminent demise. This will come about not because of Bitcoin or Libra but because the PBOC has been strategic in its thinking and tactical in its governance, co-ordinating practical solutions the will make digital currency work to the benefit of the nation.  Their comments on the topic from 2016 to now have been consistent. Digital currency is coming and China will take the lead in digital currency just as it did in digital paper currency.

[This is an edited version of an article that first appeared on Forbes, 9th August 2020.]

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. Click To Tweet

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.

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).

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.

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.

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.

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.

The dollar, de Bono and digital currency

Many people think we are now coming to the end of what economists call the “Bretton Woods II” era of international monetary arrangements and, as The Economist observed recently, it is not at all clear what the next era will look like. The way that money works now is, essentially, a blip. It is a temporary institutional arrangement and it must necessarily change as technology, businesses and societies change. I am fascinated by the possibilities surrounding the digital currencies of the future and eager to learn more about the scenarios, so I was delighted to be asked by the Centre for the Study of Financial Innovation (CSFI) to write a report on digital currency for them in my capacity as their Technology Fellow. The result was “The Digital Currency Revolution”, launched this week. I took part in a video discussion about the report with Andrew Hilton, Director of this CSFI, and if you are at all interested in the topic I invite you to get a cup of tea, put your feet up and enjoy the video of the discussion.


Part of the reason for my delight and excitement at the CSFI’s invitation is that many years ago I picked up a report from the called “The IBM Dollar”, written by the inventor of “lateral thinking”, Edward de Bono. This had a tremendous impact on me, coming as I was from the technology side of electronic money. IBM, in de Bono’s early 1990s thought experiment, might issue “IBM Dollars” that would be redeemable for IBM products and services, but are also tradable for other companies’ monies or for other assets in a liquid market. When I read this, I felt as if scales were falling from my eyes. It hasn’t occurred to me that anyone other than a central bank could issue money!

When I read de Bono’s ideas of tens of millions such currencies in circulation, constantly being traded on futures, options and foreign exchange markets, it might sound as if the “money” would be unusable because transactions would be unbearably complex for people to deal with. But as I wrote in “The Financial Times” some years ago, that’s not the world that we will be living in. This is not about transactions between people but transactions between what Jaron Lanier called “economic avatars“. This is a world of transactions between my virtual me and your virtual me, the virtual Waitrose and the virtual HMRC. This is my machine-learning AI supercomputer robo-advisor, or more likely my mobile phone front end to such, communicating with your machine-learning AI supercomputer robo-advisor.

These robo-advisors will be entirely capable of negotiating between themselves to work out the deal. Dr. de Bono foresaw this in his pamphlet, writing that pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction… the same system could match demands and supplies of financial assets, determine prices and make settlements. He also wrote that the key to any such a system would be “the ability of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties”, an early vision of what we might now call the reputation economy that I explored in one my previous books “Identity is the New Money”.

Now, two decades on from this description, we have a technology to implement and while the idea using cryptocurrencies as tokens linked to something in the real world  is hardly new (from the earliest days of Bitcoin people were using “coloured coins” to do this), token technology that creates “money like” digital assets does indeed change the calculus. When the current craziness is past and tokens become a regulated but wholly new kind of digital asset, a cross between corporate paper and a loyalty scheme, they will present an opportunity to remake markets in a new and better way.

It is reasonable to ask what will replace the IMF, central banks and commercial banks offering credit when it comes to creating money, facilitating payments and prosperity? This speculation is at the heart of my forthcoming book “The Currency Cold War”. The reaction of regulators around the world to one prominent potential competitor, Facebook’s proposed “Libra” digital currency, seems to indicate that the incumbents are not going to give up without a fight and the topic of central bank digital currency (CBDC) has arrived on the front pages. And, I will suggest, CBDCs themselves will soon arrive in wallets. If not here, then in Asia where the People’s Bank of China has been active in the digital currency arena for many years (their’s is no knee-jerk reaction to Facebook’s plan).


Given the history of financial markets and institutions, given that we know that change is inevitable as the structures reshape under social, regulatory and technological pressures, is a Bank of England electronic medium of exchange (whether some sort of cryptocurrency BritCoin or some sort of centralised database BritPESA) the end of the story The answer must be “no”. We are about to enter a new world where competition between currencies will become a new kind of Cold War where the tectonic plates of technology, soft power and economic hegemony are coming together to create a new and unpredictable landscape for the International Monetary and Financial System (IMFS). I hope you will download and enjoy “The Digital Currency Revolution” and I look forward to getting your feedback on my suggestions as to a way forward for the UK in this exciting and interesting “space race” for the future of digital money.