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.

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

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

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

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

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

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.

CSFI TV

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).

CSFI DCR

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.

Fed-PESA or Fed-Pal or Fed-Coin?

I am not an expert on American politics and I’ve forgotten all the cartoons about how a bill becomes a law and that sort of thing, but I was absolutely fascinated to read in a draft the Democratic Party stimulus proposal for the United States (the ‘Take Responsibility for Workers and Families Act’’, all 1100 pages of which are here) about the use of electronic wallets to make direct stimulus payments. The proposal says that a “digital dollar wallet” shall mean a digital wallet or account, maintained by a Federal reserve bank on behalf of any person, that represents holdings in an electronic device or service that is used to store digital dollars that may be tied to a digital [identity] or physical identity” (my emphasis).

Wow. That’s a pretty interesting vision. None of the components exist, of course, and the digital dollar didn’t make it through to the final 1,400 page version of the proposal. It did, however, reappear in a bill from Senator Sherrod Brown (D-OH), ranking member of the Senate Committee on “Banking, Housing, and Urban Affairs” that again confuses what banks, bank accounts and bank money are by calling on the U.S. Government to

    1. Allow everyone to set up a digital dollar wallet, called a “FedAccount,” a free bank account that can be used to receive money, make payments, and take out cash.

      It wouldn’t really be like a typical bank account of course, it would be more like an M-PESA account because all users would have an account in the same centralised system. Since there are millions of Americans without bank accounts (not because there is a shortage of banks, by the way) but with smartphones, something like this is long over due.

    2. FedAccounts would be available at local banks and Post Offices.

      This must mean account opening would be available in these locations because they have the facilities for rudimentary identity verification. The U.S. has no digital identity infrastructure, so these have to be co-opted. With instant digital onboarding though, the vast majority of the population ought to be able to enroll on in a couple of minutes, download the Fed-PESA app and get to work. There should be instant downloading of the associated debit card to Apple Pay or Google Pay as well.

    3. FedAccounts would have no account fees or minimum balance requirements.

      You could, of course, simply tell commercial banks to provide this service as a public service and as a condition of holding a bank licence. The problem though is two-fold: the banks don’t want to provide such as service and people without bank accounts (for a variety of reasons) don’t want to use. But if the U.S. had electronic money regulations in place, then these accounts could be provided by Walmart or someone else who understands customer service.

    4. Account holders would receive debit cards, online account access, automatic bill-pay, mobile banking, and ATM access at Post Offices.

      All of which cost money, of course, and I’m not sure that debit interchange and interest foregone would be sufficient to pay for these accounts since most of them will be empty most of the time.

    5. FedAccounts can be used to make sure that everyone who is entitled to COVID-19-related relief receives it quickly and inexpensively. That means that people will not have to rely on costly check cashers or other alternative financial services.

      Nor will they need commercial banks (why would I keep an account at a commercial bank when I can get a free account from the government). What’s more, assuming that people can transfer money from one FedAccount to another as easily as people transfer money to each other by WeChat or M-PESA (with a vanishingly small marginal cost) then why wouldn’t merchants accept it?

That last point is, of course, the proximate cause of the interest in the Uncle Sam Account (USA, as I call it) and it did lead me to think that what if the corona crisis does indeed turn out to be a trigger for a digital dollar and universal digital wallets? I’m with Senator Brown in trying to find a 21st century solution at a time of national crisis. That would be amazing. But is this right architecture? Setting aside what might be meant by a “digital identity” for the moment, let us just focus on the digital dollar.

How would it work? Would people really have accounts with or devices from a central bank?

Fed-PESA or Fed-Pal or Fed-Coin?

There are obviously a number of different ways that the digital currency could be implemented by central bank as part of strategy to move to a cashless society (by which of course I’m in a society where cash is irrelevant not where it is illegal). Way back in the 1990s the model that was chosen for the Mondex experiment that began in the UK was to have the central bank control the creation of digital currency but have it distributed by the commercial banks through their existing channels

As I set out in my forthcoming book “The Currency Cold War“, this is only one of the ways of implementing a digital currency. The obvious, and potentially much cheaper, alternative is the Sherrod Brown plan: simply have the central bank create accounts for all citizens, businesses and other organisations. You could imagine something like amperes but on population scale, Bank of England pairs are if you like, in the UK example. This will be cheaper because it will be completely centralised and the marginal cost of transferring value from the control of one personal organisation to another through such a system would be absolutely negligible.

Central banks don’t really want to do this, however, because it would mean having to manage millions of accounts and they would prefer somebody else to do this and deal with everything else that goes with interacting with the general public. The commercial banks and plenty of other non-bank players (think Alipay in China for example) already have the apps, the infrastructure and the innovative approach that would not only bring the digital currency to the mass market but would also open up the potential for the digital currency as a platform for innovation and development.

This is what the Chinese refer to as the “two tier” approach (personally, I insist on calling it the Mondex approach) and I don’t doubt that it will be the approach adopted by commercial banks around the world where that time comes because the problems attendant on the disintermediation of the commercial banks are great. In the Bank of England’s March 2020 discussion paper on “Central Bank Digital Currency” (which is an excellent report by the way), they call this neither the two-tier nor the Mondex approach but the “platform approach” and quite rightly note that one of the key advantages of it is that it will help innovation throughout the “stack”.

Now imagine a merging of something like India’s UPI, M-PESA, social media and the “lifestyle apps” coming from the Far East and you can begin to develop a picture of just how powerful such an implementation might be in all markets. The Bank of England uses some specific terminology which I think makes sense and will allow for constructive discussions between regulators, businesses and innovators in the payments space. In the Bank of England’s platform model it is assumed that the central bank runs the platform (will come back to what the platform means in a moment) and provides what the Bank of England call “API access” to this platform. The people are allowed to access the platform are labelled Payment Interface Providers (“PIPs”) and it is these providers (banks among them course) who interact with users.

This seems to make a lot of sense to me. If anyone can pass on Mr. Brown’s address, I will cheerfully send the Senator a copy of my book hot from the press.

The Real Innovation

The Bank of England are clear that they do not envisage this platform as a cryptocurrency platform (although I can see reasons why this might be appropriate, the Libra-style architecture goes in this direction for example) but they do say that the technologies of a shared ledgers might be the best way to implement the reason it out in my book. Were such a system to come into existence its resilience and availability would become matters of vital national interest Therefore it will make complete sense to take advantage of the new technologies and construct a decentralised and robust solution. It’s quite easy to imagine what this might be. Each bank would have the option of maintaining its own or accessing somebody else’s, all banks above a certain size would be mandated to keep a copy of the ledger and the payment interface providers gateways would simply talk to each other (through the normal protocols of consensus chosen for the particular architecture) but there will be no central system in the middle that could either because of management failings princess usually the case), unforeseen technical problems or subversion by foreign powers.

The paper, which I urge you and Senator Brown to read, goes into a lot of detail about the design of such a viable national system and notes, as I do, that one of the most game changing aspects of such implementation would be what they call “programmable money”, what I called “smart money” in my previous book “Before Babylon, Beyond Bitcoin” and what a variety of ill-informed and misleading observers insist on referring to as “smart” “contracts” although they are in fact neither. This is where the real innovation will take place that will make the money of the future so very different from the money that we have now and I am very keen to see thinking develop in this area. There are obviously overheads associated with overloading the ledger with the distributed applications but on the other hand it may be that there are some truly revolutionary features that can only be delivered through such applications. The bank suggests a compromise whereby certain distributed applications are provided for the use of the PIPs in order to give them infrastructure that they can then use to develop innovative end-user services and this seems a good place to start.

All of which is by way of saying that Senator Brown’s proposal for a sort of Fed-PESA, while being well-intentioned, will tie a boat anchor to U.S. payments system. Far better to create smart money, money with an API, and unleash a next generation of creativity. Personally, I hope that the Bank of England decide to take the global lead in the race to create money for the digital future, rather than continue with digitised versions of money from the analogue past, and I for one would bet on them to succeed.

Covering up and COV-19

The current pandemic has thrown up a particularly interesting case where conventional thinking doesn’t help us to understand how things could work in the future. We’ve all read with interest the accounts coming from Asia, and now Israel, of the use of mobile phone location data to tackle the dread virus. In the UK, the government has used some aggregate and anonymised mobile phone location data to see whether people were following social distancing guidelines, but it can actually play a much bigger role in tackling pandemics.

China got the virus under control with lockdowns in areas where it was endemic and apps to stop it from getting a foothold where it wasn’t. In Shanghai, which has seen few death, QR codes were used to authorise entry to buildings and to collect a detailed contact history so that control could be targeted in the case of infection. The Economist (21st March 2020) reported that the use of these codes was pervasive, to the point where each individual carriage on a subway train had it’s own code so that if someone tests positive only their fellow passengers need be contacted rather than everyone on the train.

South Korea, a country of roughly 50 million people, appears to have dealt with the pandemic pretty effectively. By mid-March it was seeing less than a hundred new cases per day. It did so without locking down cities or using the kind of authoritarian methods that China had used. What it did was to test over a quarter of a million people and then using contact tracing and strict quarantine (with heavy fines and jail as punishment). They were able to do this because legislation enacted as a result of the Middle Easterners Respiratory Syndrome (MERS) epidemic in 2015 meant that the authorities can collect location data from mobile phones (along with payment data, such as credit card use) from the people who test positive. This data is used to track the physical path of the person and that data, with personally-identfiable information removed, is then shared via social media to alert other people that they need to go and be tested. At the time of writing, South Korea has seen a hundred deaths, Italy (with a similar population) has seen more than thirty times as many.

Infrastructure and Emergency

Why does this make me think about the future? Well, it’s really easy to design a digital identity infrastructure for the most of us for most of the time. Trying to figure out how to help a law-abiding citizen with a passport or driving licence to open a digital bank account or to login remotely to make an insurance claim or to book a tennis court at a local facility is all really easy. It doesn’t provide any sort of stress test of an identity infrastructure and it doesn’t tell us anything about the technological and architectural choices we should be making to construct that infrastructure. That’s why I’m always interested in the hard cases, the edge effects and the elephants in the room. If we are going to develop a working digital identity infrastructure for the always-on and always-connected society that we find ourselves in, then it must work for everybody and in all circumstances. We need an infrastructure that is inclusive and incorruptible.

This is why whenever somebody talks to me about an idea they have for how to solve the “identity problem” (let’s not get sidetracked into what that problem is, for the moment) then I’ll always reach into my back pocket for some basic examples of hard cases that must be dealt with.

(In conference rhetoric, I used to call these the “3Ws”: whistleblowing, witness protection and adult services. In fact, it was thinking about whistleblowing many, many years ago when I was asked to be part of a working group on privacy for the Royal Academy of Engineering. Their report on “Dilemmas of Privacy and Surveillance” has stood the test of time very well in my opinion.)

My general reaction to a new proposal for a digital identity infrastructure is then “tell me how your solution is going to deal with whistleblowers or witness protection and then I will listen to how it will help me pay my taxes or give third-party access to my bank account under the provisions of the second Payment Services Directive (PSD2) Strong Customer Authentication (SCA) for Account Information Service Providers (AISPs)…”. Or whatever.

Healthy Data

The pandemic has given me another “hard case” to add in to my thinking. Now I have 4Ws, because I can add “wellbeing” to the list.  A new question will be: How does your proposed digital identity infrastructure help in the case of a public health emergency?

Whatever we as a society might think about privacy in normal circumstances, it makes complete sense to me that in exceptional circumstances the government should be able to track the location of infectious people and warn others in their vicinity to take whatever might be the appropriate action. Stopping the spread of the virus clearly saves lives and none of us (with a few exceptions, I’m sure) would be against temporarily giving up some of our privacy for this purpose. In fact, in general, I am sure that most people would not object at all to opening their kimonos, as I believe the saying goes, in society’s wider interests. If the police are tracking down a murderer and they ask Transport for London to hand over the identities of everybody who went through a ticket barrier a certain time in order to solve the crime, I would not object at all.

(Transport for London in fact provides a very interesting use case because they retain data concerning the identity of individuals using the network for six weeks after which time the data is anonymized and retained for the purposes of traffic analysis and network improvement. This strikes me as a reasonable trade-off. If a murder is committed or some other criminal investigation is of sufficient seriousness to warrant the disclosure of location data, fair enough. If after six weeks no murders or serious crimes have come to light, then there’s no need to leave members of the public vulnerable to future despotic access.)

It seems to me that the same is true of mobile location data. In the general case, the data should be held for a reasonable time and then anonymized. And it’s not only location data. In the US, there is already evidence that smart (ie, IoT) thermometers can spot the outbreak of an epidemic more effectively than conventional Center for Disease Control (CDC) tracking that replies on reports coming back from medical facilities. Massively distributed sensor network produce vast quantities of data that they can deliver to the public good.

It is very interesting to think how these kinds of technologies might help in managing the relationship between identity, attributes (such as location) and reputation in such a way as to simultaneously deliver the levels of privacy that we expect in Western democracies and the levels of security that we expect from our governments. Mobile is a good case study. At a very basic level, of course, there is no need for a mobile operator to know who you are at all. They don’t need to know who you are to send a text message to your phone that tells you you were in close contact to a coronavirus character carrier and that you should take precautions or get tested or whatever. Or to take another example, Bill Gates has been talking about issuing digital certificates to show “who has recovered or been tested recently or when we have a vaccine who has received it”. But there’s no reason why your certificate to show you are recovered from COV-19 should give up any other personal information.

I think that through the miracles of cryptographic blinding, differential privacy and all sorts of other techniques that are actually quite simple to implement in the virtual world (but have no conventional analogues) we ought to be able to find ways to provide privacy that is a defence against surveillance capitalism or state invasion but also flexible enough to come to our aid in the case of national emergency.

(Many thanks to Erica Stanford for her helpful comments on an earlier draft of this post.)

Minted! Canada and Digital Cash

According to Bloomberg, Tim Lane (the Deputy Governor of the Bank of Canada) is “laying the groundwork to introduce a digital currency, should the need for one emerge”. What caught my eye about this story was, of course, that Canada has already had two digital currencies and abandoned both of them! The first was Mondex, the second was MintChip. Let’s have a quick chat about them.

Mondex, eh? 

So 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. 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. It was true cash replacement.

It was invented at National Westminster Bank (NatWest) in 1990 by Tim Jones and Graham Higgins. In December 1993, (NatWest) launched Mondex in a joint development pilot with Midland Bank (part of HSBC) also in the UK and British Telecom (BT) and began planning their pilot in Swindon. Swindon had been chosen as, essentially, 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

Unfortunately, it just never worked for consumers. It was pain to get hold of – I can remember the first time I walked into a bank to get a 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 also 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 too, not because they could use it pay for anything but because you could put the Mondex card into the phone and press a button and hey presto your account balance would be displayed on the phone. This was amazing two decades ago.)

For the poor sods who didn’t have one of those phones (essentially, all Mondex card users) 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 have 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. Most people couldn’t be bothered. If you go to an ATM with your ATM card then you might as well get cash, which is what they did.

Anyway, while Swindon hogged the limelight and will forever remain a key milestone on the road to digital cash, Guelph in Canada also had a special place in the hearts of digital currency scholars because the Royal Bank of Canada and CIBC brought the Mondex technology to Canada in 1995 and then in 1997, Bank of Montreal, TD Bank, Canada Trust, Bank of Nova Scotia, National Bank of Canada, the credit unions, and Caisse Desjardins formed Mondex Canada.

 

It got canned at the end of 1998, having never got anywhere near critical mass.

Oh well. Remember Mintchip?

This was developed by the Royal Canadian Mint as a sort of Mondex but in mobile phones instead of smart cards. It was intended as a secure way to send and spend money online, launching the project in April 2012 and showing off its first implementation in 2014.

I was one of the judges for the MintChip Challenge competition. Vitalik Buterin, the inventor of Ethereum, rather kindly mentioned me in dispatches at the time, saying that the Mint has been watching digital currency efforts on the internet for many years now, and “on the board of the MintChip Challenge’s judges are people like David Birch, who has researched Bitcoin extensively and even spoke at the Bitcoin conference in Prague last November.”

In the end, MintChip never made it to the mass market and was sold to nanopay in 2016 when the Mint decided that this central bank digital currency stuff probably wasn’t going anywhere. However, many of that team (with all of the expertise they gained in person-to-person digital cash implement in mobile phones) are still working in the Canadian payments sector today, so could hit the ground running!

So what’s my point?

Well, if the Bank of Canada really does want to lay the groundwork for digital currency, I’d be happy to point them in the direction of a fair few Canadians with some relevant expertise and experience. I might also urge them to make sure that the lessons from those early experiments with virtual Loonies aren’t lost. In particular, there are three lessons that I draw from that time when back with perfect hindsight.

The first lesson is that banks are very probably the wrong people to launch this kind of initiative. Our 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 a bank 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. I can remember when the publicans of Exeter asked the banks to install Mondex terminals in the pubs since all of the students had cards and the bank refused on the grounds that the University’s electronic purse was only for use on campus. Normal companies don’t think like this. 

(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.)

That’s not to say that a central bank is necessarily the best home for digital currency either, but perhaps so sector-wide or cross-sector consortium might be better.

The second lesson is that the calculations about transaction costs (which is what I spent a fair bit of my time doing) actually really didn’t matter: they had no impact on the decision to deploy or not to deploy in any particular application. I remember spending ages poring over calculations to prove 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 and nobody cared. I went to present the findings to a bank that was actually funding satellite TV rollout at the time, BT who were providing the backhaul and the satellite TV provider themselves. Nobody cared. The guys at the bank told me that they didn’t have the bandwidth for it (which meant, I think, that they had no interest in spending money so that another part of the bank might benefit). The banks with big acquiring operations were being asked to compete against themselves and so they didn’t care either. The transaction cost, which I thought was the most important factor, really wasn’t one of the drivers.

The third lesson is that while the solution was technically brilliant it was too isolated. The world was moving to the Internet and mobile phones and to online in general and Mondex was trying to build something that was optimised not to use of any of those. At the time of the roll-out, I had an assignment for the strategy department of the bank to provide technical input to a study on the future of retail banking that one of the big management consultancies was working on. I remember being surprised that it didn’t mention the Internet, or mobile phones or (and here’s something that I thought would be big but was also wrong about) digital TV. Most of their work as far I as could see was on redesigning the furniture in the branches.

Mondex was designed to be the lowest-cost peer-to-peer offline electronic cash system at exactly the moment that the concept of “offline” began to fade. It was not alone in failing to react to this fundamental change and it’s an interesting point to consider with hindsight: why did we make systems such as Danmont, Mondex, VisaCash and use them to compete with cash in the physical world rather than use them in the virtual world where there was no cash?

(This was clear to me very early on in the experiment and isn’t hindsight. I drew the same lesson from the Mondex pilots in Canada and the USA as well. The banks put Mondex terminals in places where they already had card terminals that worked perfectly well. You could use Mondex cards in Swindon in the places that acquired bank-issued payment cards, such as supermarkets, but not in places where digital cash had a real competitive advantage: on the Internet, in vending machines and at the corner newsagents.)

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, there were for mobile operators who had started to look at payments as a potential business. These 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.

So, for a variety of reasons, Mondex never caught on. It never got even half of the 40,000 hoped-for users in Swindon and usage remained low. And a quarter of a century on, the contactless card and the mobile phone (and in a week the combination of the two in ApplePay and GooglePay) continue to displace cash, we still don’t have a mass market cash alternative on the web (yes, I know, Bitcoin, whatever) and prepaid card propositions, while still expensive (because they use the existing debit rails), are widespread.

Canadian Digital Currency

Should the Bank of Canada simply relaunch Mondex or Mintchip then? Well, a bastard child of Mondex and Mintchip (and let’s not forget contactless pioneer Dexit launched in Toronto as well) is not such a crazy idea.

To a first approximation, everyone in Canada has a smartphone with a tamper-resistant secure chip inside it. And if Canada wants to compete with China, it has to set a high bar! Remember that Mu Changchun (deputy director of PBoC’s payments department) said back in October 2019 that the proposed Chinese digital currency can be used “without an internet connection would also allow transactions to continue in situations in which communications have broken down, such as an earthquake”. He went on to say, accurately, that “even Libra cannot do this” (because Libra, like Bitcoin needs to be online).

Now, if that doesn’t sound like Mondex and Mintchip, I don’t know what does.

Cash and coronavirus, gross and Grossman

China has been quarantining people to prevent the spread of the dreaded coronavirus (as has the UK and everywhere else) but now it has started to quarantine money as well. The government has stopped the transfer of old bank notes between cities most affected by the virus and has started to sanitise old money to reduce the risk of infection and well as producing heading toward $100 billion of new cash. Cash from hospitals and food markets is being segregated. The banknotes will be bombarded with ultraviolet rays or heated and then put under lock and key for a fortnight (only a week in less risky areas apparently) before it is let loose again.

This may seem an overreaction, but it isn’t. Money is filthy and I find stories about how filthy cash is both interesting and amusing. According to the Wall Street Journal, NYU researchers analysed the genetic material on $1 bills and found 3,000 types of bacteria in all (the most abundant species they found is one that causes acne). More scarily, some of the bacteria carried genes responsible for antibiotic resistance. I am not accusing Americans of having particularly revolting money, by the way. Back in the UK, ours is just as bad.

As the Daily Mail noted, there are more germs on a £1 coin than a toilet seat, but only one in five people wash their hands after handling them (coins, I assume they mean, not toilet seats). That money is filthy is not news to me because a generation ago when the first wave of electronic cash was in pilot, there were some groups of retailers who rather liked the idea of shifting away from cash to electronic money for reasons that were nothing to do with economy or efficiency. I remember talking to a hairdresser in Swindon during the Mondex pilot, and she told me that she liked the idea of doing away with cash because cash was filthy and she had to keep washing her hands all day because of touching it. Somebody in a bakery mentioned the same to a colleague of mine. Lucre really is filthy.

I talked about this years later in one of my first ever blog posts, called “End the cash menace now!“. From time to time over the years, I’ve brought this up as one of my general and persistent complaints about cash. And it isn’t just the cash that is filthy. ATMs in the UK are also reservoirs of pestilence. And sadly, so are plastic cards (in fact, in a spirit of scientific enquiry, I should report that one study in London found a higher percentage of contaminated cards!). It seems as if a lot of things, in the UK at least, are absolutely filthy.

Unfortunately, I don’t think the dirty money meme plays into my pro-electronic money hands as much I’d like. After all, it is mobile phones that are going to get rid of cash and here the news is not good. The average mobile phone is even dirtier than the bank notes! It’s not hard to see why because in the UK faecal bacteria are present on 26% of hands, 14% of banknotes and 10% of credit cards. That article goes on to say that one in six mobile phones are dirtier than toilet seats, although I’m not sure whether they are dirtier than £1 coins although as my colleague Neil McEvoy points out, you don’t generally pay for things using other people’s mobile phones.

My final piece of evidence that we are unlikely to be able to use the filthy, germ ridden, infectious nature of money as a propaganda tool in the war on cash came from the Tomorrow’s Transactions Forum back in 2012 when one of the speakers, or one of the panellists (I can’t remember which), made a remark about the propensity of money to pass on communicable diseases. One of my favourite journalists, Wendy Grossman, was there at the time and she immediately countered the speaker by making an unequivocal offer to lick any money that Forum delegates might wish to present. Throwing herself on the barbed wire for science, so to speak, earned her a place in Forum folklore. As Wendy wrote, calling it “Microsoft-level FUD, and not worthy of smart people claiming to want to benefit the poor and eliminate crime”, she licked a fiver and a Danish banknote. Last time I saw her she appeared fit as a fiddle, but perhaps the delegates that day had exceptionally clean money.

By the way, if you are curious about the relationship between cash and filth, check out these amazing pictures from Heidi Hinder, an artist who also spoke at the Tomorrow’s Transactions Forum, showing the bacteria from coins growing in culture.

Hinder screen shot

Courtesy: Heidi Hinder. Photo: Jon Rowley.

When it comes down to it, money is filthy, but so are we. I’m afraid, much as I hate the horrible stuff, germs aren’t the nail in cash’s coffin that I’d hope, but I wish China all best in locking it away in the interests of public health.

Science bitch

By the way, I remember a report from MasterCard that reported that on average European banknotes and coins contain 26,000 bacteria while good old Sterling has a mere 18,200 bacteria. So Brexit Britain’s money is cleaner than European money!