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.

Paypalpassword

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 Forbes.com, 25th October 2020.]

Kim Kardashian, COVID and escape to the cyburbs

Kim Kardashian’s trip to a private island with a few close friends has attracted some criticism from normal people who are unable to outrun this virus in their Gulfstreams, but she is hardly the only one percenter to be using her wealth as an alternative to social distancing, face masks and work-from-home lockdown misery. Douglas Rushkoff wrote eloquently about the phenomenon of the rich moving out of cities to comfortable mansions in the country to avoid the pandemic. He talks about the rich building their “escape pods” and (with what I imagine to be frightening prescience) how the journey from video doorbell to autonomous robots sentries is constrained by money, rather than by ethics.

Inept government responses to COVID are pushing those escape pods to escape velocity irrespective of the actual risk. Indeed, as Rushkoff goes on to say, he “can’t help but wonder if the threat of infection is less the reason for this newfound embrace of virtual insulation than it is the excuse”. The rich have had enough of the rest of us and they don’t want to be another country, they want to be another planet.

As a wage-slave scrabbling to make a living in the post-pandemic ruins of a career, I will never be able to afford that private island with ground-to-air missile defences and live-in help. But I can afford a nice chair for my study, some patio furniture of when it’s warm and high-speed broadband (props to Virgin, by the way). With this, I can retreat from a dangerous, unpleasant and confusing physical world into a controlled organised and above all safe virtual world. I am more than happy to commute through cyberspace rather than on crowded, unpleasant and disease-ridden trains.

Speedtest

Escape velocity, Woking-style.

There must be a lot of people thinking this way right now, judging by the deserted streets I saw in London last week. And it is interesting to me because I agree with Sam Lessin’s observation that if a result of the pandemic is more online working, online commerce, online education, online government and so on, then we will see that digital identity will be a crucial pivot. His point that “if the jobs people need are in digital rather than physical space, the internet’s side of the fight will gain a lot of power” is accurate and I think the consequences of that win are more significant and more far-reaching than may at first be obvious.

The digital identity that I use in the online world will be vastly more important to me than the physical identity that I might occasionally need at an airport. Click To Tweet

In other words, the digital identity that I use to traverse the highways and byways of the online world will be vastly more important to me than the physical identity that I occasionally need at an airport (should I ever get to fly anywhere again).

Never mind a flight to the suburbs, I predict a flight to the cyburbs.

The safe, digital space where I will earn a living is a cyburb, a little corner of the internet where I will live with people are who, broadly speaking, like me. Kind of like the gated community that my cousin retired to in America. A crucial difference, however, between these gated communities in cyberspace and their real-world equivalents in the Hamptons is that digital identity will form a more effective boundary than the barbed wire and armed guards of the gated communities that the rich will retreat to in the real world. The people living in the cyburbs will be happy to pay taxes for better broadband and efficient home delivery and neighbourhood security, but it is going to be pretty difficult to persuade them to pay tax to support public transport in the city that they never visit, police they never see and services for (as they see it) the unchecked angry youth roaming the city streets.

When the residents decide on a new ordinance, they can enforce it instantly and effectively and will exclude transgressors by removing access from their virtual selves. There may be all sorts of constitutional and legal issues with stopping people you don’t like from walking down your physical street, but there’s no problem at all with stopping them from walking down your virtual street. In a reputation economy, justice takes a different form: taking away your attributes can be much more of a punishment than putting you in jail. Life will be ordered and managed. It will be safe.

Out in the cyburbs, code is law.

It seems to me that if society divides across the online and offline fault line, then for a great many people the emerging new world looks more appealing than the old physical world. Lessin’s observation that “a world where people come to earn money mostly online and disconnected from the physical world is a world of internet ascendancy” reinforces the view set out in my book Identity is the New Money (LPP: 2014) that we are going back to the future. What I meant by this was that mobile phones, the Internet and social media allow us to escape the urban anonymity of the industrial revolution and organise ourselves by communities. In the neolithic world, of course, people lived in one community and its boundaries were geographic. Our brains were assembled for optimal interaction in the clan of around 150 people, a number well known to social scientists. In the online world, each of us will belong to multiple overlapping clans that are defined by what people are rather than who they are and the boundaries will be soft, defined by credentials not identity.

These clans will range from friends and family to work and play. Between my Dungeons and Dragons clan and my extended family clan and my Arrest The Prime Minister clan, I’m fine. You can see why people will prefer to live this way. If I break the rules of the Woking FC Season Ticket Holder’s clan, then I will be cast out. End of story. There won’t be a bill of rights any more than there is one for Facebook Groups, no more free speech than there is on Twitter and no more right to reply than there is on Instagram.

Cyburbia might sound like a virtual Disney village to you, a bland echo chamber existence devoid of creativity or imagination, but to a great many people it sounds like heaven.

(This is an edited version of an article that first appeared on Medium, 7th September 2020.)

Breaking up Big Tech is so last century

What should regulators do about the power of the big technology companies? In America, the Justice Department has just filed massive anti-trust suit against Google, which many think marks the beginning of a new era of regulation for “Big Tech” and the the House Judiciary Committee’s antitrust panel have just completed a 16 month investigation into Amazon, Apple, Google and Facebook. That panel found that Big Tech has what is calls “monopoly power” in key business segments and has “abused” its dominance in the marketplace. It was a thorough condemnation of the internet giants. The panel complains that there is “significant evidence” to show that BigTech’s anticompetitive conduct has hindered innovation, reduced consumer choice and even weakened democracy.

So, what is to be done? I had the honour of chairing Professor Scott Galloway who is the author of “The Four”, an excellent book about the power of internet giants (specifically Google, Apple, Facebook and Amazon – hence the title), at a conference in Washington a while back. He set out a convincing case for regulatory intervention to manage the power of these platform businesses. Just as the US government had to step in with the anti-trust act in the late 19th century and deal with AT&T in the late 20th century, so Professor Galloway argues that they will have to step in again, and for the same reason: to save capitalism.Galloway

With Professor Galloway in Washington, DC.

Professor Galloway argues that the way to do this is to break up the internet giants. Should Congress go down this route? Well, one of the panel’s own members, Ken Buck (Republican), while agreeing with the diagnosis, said that the Democratic-led panel’s proposal to force platform companies to separate their lines of business (ie, break them up) is not the right way forward. I agree. Forcing Amazon to spin out Amazon Web Services (to use an obvious and much-discussed example) won’t make any difference to Amazon’s role in the online commerce world.

Breaking up big companies seems to me an already outdated industrial-age response in the post-industrial economy. Click To Tweet

Google is not U.S. Steel, data is not the new West Texas Intermediate and Facebook is not the new Standard Oil. However, the idea of focusing regulation on the refining and distribution of one of the modern economy’s crucial resources has logic to it. We need this regulation to protect competition in the always-on world of today and there are plenty of alternatives to breaking up technology companies, as Angela Chen explained very well in MIT Technology Review last year. Perhaps the most fruitful way forward is an approach based on a future capitalist framework along the lines of what Viktor Mayer-Schönberger and Thomas Range called in Foreign Affairs a “progressive data sharing mandate”.

There are many informed observers who say that America should to look see what is going on in Europe in order to formulate this kind of approach: Here in Forbes last year, Robert Seamans and “Washington Bytes” highlighted data portability as a potentially valuable approach and pointed to the UK’s open banking regulation as a source of ideas. I think this makes a lot of sense and that a good way to explore what some form of data-centric remedy might look like is indeed to take a look at Europe’s open banking regime. More specifically, start with what it got wrong: because in that mistake are the seeds of a solution.

Cake

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

Back in 2016, I wrote about the regulators demanding that banks open up their APIs to give access to customer data that “if this argument applies to banks, that they are required to open up their APIs because they have a special responsibility to society, then why shouldn’t this principle also apply to Facebook?”. My point was, I thought, rather obvious. If regulators think that banks hoarding of customers’ data gives them an unfair advantage in the marketplace and undermines competition then why isn’t that true for Big Tech?

When I said that the regulators were giving Big Tech a boost in “Wired World in 2018”, no-one paid any attention because I’m just some tech guy. But when Ana Botin (Executive Chairman of Santander) began talking about the lack of any reciprocal requirement for those giants to open up their customer data to the banks, regulators, law makers and policy wonks began to sit up and pay notice. She suggested that organisations holding the accounts of more than (for example) 50,000 people ought to be subject to some regulation to give API access to the consumer data. Not only banks, but everyone else should provide open APIs for access to customer data with the customer’s permission.

This is along the lines of what is being implemented in Australia, where open banking is part of a wider approach to consumer data rights and there will indeed be a form of symmetry imposed by rules that prevent organisations from taking banking data without sharing their own data. The Australian Competition and Consumer Commission (ACCC) has already had enquiries from international technology companies wanting to participate in open banking. The banks and many others want this method of opening up to be extended beyond what are known as the “designated” sectors, currently banking and utilities, so that if a social media company (for example) wants access to Australian’s banking data it must become an “accredited data recipient” which means it turn that it must make its data available (in a format determined by a Consumer Data Standards Body).

A symmetrical approach along these lines would not stop Facebook and Google and the others from storing personal data but it would stop them from hoarding it to the exclusion of competitors. As Jeni Tennison set out for the UK’s Open Data Institute, such a framework would allow “data portability to encourage and facilitate competition at a layer above these data stewards, amongst the applications that provide direct value to people”, just as the regulators hope customer-focused fintechs will do using the resource of data from the banks.

SIBOS 2020

This year, the SIBOS event was totally online.

At this year’s SIBOS (it’s a sort of Burning Man for bankers), the CEO of ING Steven Van Rijswijk re-iterated the need for reciprocity, saying that he wanted the regulators come up with an equivalent for banks so “the data flow can go two ways”. Well, this may be on the horizon. As the Financial Times observed, an early draft of the EU’s new Digital Services Act shows it wants to force Big Tech companies to share their “huge troves” of customer data with competitors. The EU says that Amazon, Google, Facebook and others “shall not use data collected on the platform . . . for their own commercial activities . . . unless they make it accessible to business users active in the same commercial activities”.

It seems to me that U.S. regulators might use this approach to kill two birds with one stone: requiring both Big Banking and Big Tech to provide API access to customer’s data. Why shouldn’t my bank be able to use my LinkedIn graph as input to a credit decision? Why shouldn’t my Novi wallet be able access my bank account? Why shouldn’t my IMDB app be able to access my Netflix, Prime and Apple TV services (it would be great to have a single app to view all of my streaming services together).

Symmetric data exchange enforcing consumer-centric data rights can lead to a creative rebalancing of the relationship between the technology and banking sectors and make it easier for new competitors in both to emerge. Instead of turning back to the 19th and 20th century anti-trust remedies against monopolies in railroads and steel and telecoms, perhaps open banking adumbrates a model for the 21st century anti-trust remedy against all oligopolies in data, relationships and reputation. The way to deal with the power of BigTech is not to break them up, but to open them up.

[This is an edited version of an article that was first published on Forbes, 12th October 2020.]

National Wealth Service

In the UK, last year’s report on “Consumer Priorities for Open Banking” by Faith Reynolds and Mark Chidley (which is, by the way, an excellent piece of work and well worth reading) set out just why it is that open banking by itself delivers quite limited benefits for consumers. They point towards a future of open finance (and, indeed, open everything else as well) and talk about an industry that uses the new technologies of artificial intelligence, APIs, digital identity and so on to take a more complete view of a customer’s situation and provide services that increase the overall financial health of that customer. I thought this was a very interesting way of creating a narrative for the next-generation fintech and regtech propositions.

Oct1 financial health

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

We are beginning to see initiatives focused on financial health and wellness. My good friend Rik Coeckelbergs, founder of “The Banking Scene” in Belgium, talks in those terms also. He recently wrote that a bank must support its customers in having “a financially balanced life, helping them to reduce financial stress by improving their financial wellbeing”. The more I think about it, the more I agree with Rik that this should be one of the societal responsibilities of banks as heavily-regulated players crucial to the nation’s well-being. Just as electricity companies are regulated to not only produce electricity but not to pollute their environment or kill consumers because of poor safety, so perhaps it is time to apply some similar thinking.

Two-thirds of executives surveyed said financial health was important but less than fifth were reporting on it. Click To Tweet

Where should we start? As the CFSI reported, while more than two-thirds of executives surveyed said financial health was a “strategic priority”, less than a fifth were actually reporting on customer financial health, which would seem to be a good trigger for practical initiatives and a way to encourage regulators, partners and customers themselves to ask questions about improvements in financial wellbeing. That’s not to say that nothing is happening, of course! For example, JPMorgan Chase have committed to give $125 million over the next five years to non-profits working around the world to improve the financial health of underserved communities and efforts such as this deserve applause.

Writing more recently in the Harvard Business Review, Todd Baker and Corey Stone explore some interesting ideas around this. They say that the prevailing paradigm (of markets and choice) has created a regulatory system that “largely places responsibility — absent the most egregious abuse — on the individual consumer”. They argue for a radically different regulatory structure to more directly connect the success of financial services providers to their customers’ financial health, a where-are-the-customers’-yachts approach where banks prosper when their account holders prosper. They draw an interesting analogy by comparing this approach with experiments in the American health marketplace that pay providers for improving patients health, “rather than paying them simply for treating patients regardless of the outcome of the medical intervention”.

My good friend Ron Shevlin wrote a great piece about this in Forbes arguing that financial health platforms will emerge to provide this next generation of financial services and pointing out that it will provide some terrific opportunities for fintechs. He suggests that aggregators such as MX, Plaid, Yodlee or Finicity could be a real catalyst in making something happen. I agree: if we can connect the potential for open banking to provide the data to the potential for new players to use that data, we can expect to see real innovation. This kind of thinking delivers a useful narrative for stakeholders to communicate around the post-pandemic financial services they must necessarily develop to support communities in their recovery from the COVID chaos and beyond.

I think this is really important. Refocusing the sector on delivering financial health, rather than financial services has implications that go way beyond choosing better credit cards or spending less on coffee and more on pensions. The American Psychological Association considers financial stress to be one of the top stressors in America and research shows clearly that financial stress and economic hardships link to a variety of very negative physical and mental health outcomes, ranging from abuse and neglect to household dysfunction and heart disease. There is no doubt about it: improving financial health improves health in general.

In order to do this, financial health providers will need a better picture of individuals and their circumstances. They need the raw data to work with. Just as the doctor needs X-rays, bloods and histories, so the AI that powers an effective financial health provider needs your transaction records from your checking account, your mortgage, your pension, your insurers and everywhere else. In the current economic downturn, to highlight the obvious example, many people make a lot mistakes in managing their finance through stressful and unfamiliar circumstances. But as was pointed out in the Wall Street Journal recently, most of these mistakes are very basic. It does not take a giant supercomputer and all of the data in the word to stop people from falling into common traps around the way they borrow, save, spend and invest.

I wouldn’t go so far as to say that we need a National Wealth Service in the UK, but we might imagine a situation where employers strive to improve employees wealth, just as they provide health benefits now by funding financial counseling as an employee benefit. The cost of providing such services, in a world of AI and machine learning, is affordable and delivers something of real value to the normal person who is, frankly, as ill-equipped as I am to make decisions about pension plans and savings and so on.

This is why I so sure that the connection with open banking, open finance and open data means the potential for a real revolution in consumer finance and this time it will be a  revolution that will make life better for the average consumer.

[This is an edited version of an article that first appeared on Forbes on 1st 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 Forbes.com, 26th July 2020].

Credit cards are 62. OK, Boomer.

In their excellent paper “The Ascent of Plastic Money: International Adoption of the Bank Credit Card, 1950–1975” in Business History Review (Issue 92, 2018), Bernardo Batiz-Lazo and Gustavo A. Del Angel state unequivocally what we all know to be true: that the bank-issued credit card marked a turning point in the history of retail payments and most countries saw an explosion in the number of new domestic entrants into “paying with plastic” following the spread of the American pioneer BankAmericard (eg, to Barclaycard in the UK) and its later rival Interbank.

The genesis of that pioneering BankAmericard was the “Fresno Drop”, a day that should be celebrated throughout the financial services sector and every other sector as well. On 18th September 1958, Bank of America officially launched its first 60,000 credit cards in Fresno, California, setting in motion an experiment that changed the American way of borrowing, paying and budgeting.

And, in time, changed everyone else’s way of doing those too.

Now is not the time to go over the whole story, and I am sure most of you are familiar with it anyway, but if you want a good introduction to the history of the credit card, from the Fresno Drop up to the Internet, I’d recommend Joe Nocera’s “A Piece of the Action“, which I read many years ago and still pick up from time to time. On the other hand, if you want to spend five minutes having a quick look at where the modern credit card business comes from, here’s the short version (courtesy of CNN Money)The most extraordinary episode in credit card history is the great Fresno Drop of 1958. The brainchild of a Bank of America middle manager named Joe Williams, he mailed out 60,000 credit cards, named BankAmericards, to nearly every household in Fresno [and] thousands of ordinary people suddenly found that thousands of dollars in credit had literally dropped into their laps…

No applications, no credit scoring, no approval mechanism. Almost every household got one. Each card had a credit limit of $500 (that’s around $5,000 adjusted for inflation). It was an astonishing and audacious experiment.

Windhield

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

There you go. Now you can go ahead and bore at least one person today with the story of the Fresno Drop. I know I will, because I cover the drop in my book Before Babylon, Beyond Bitcoin, where I point out that what is sometimes overlooked from our modern perspective is that the evolutionary trajectory of credit cards was not a simple, straight, onwards-and-upwards path. For the first decade or so, it was far from clear whether the credit card would continue to exist as a product at all, and as late as 1970 there were people predicting that banks would abandon the concept completely. Margins were thin and as Dee Hock, the visionary founder of the inter-bank organisation that became Visa, wrote in his history of the industry that at the end of the 1960s fraud was spiralling out of control and threatening to kill the industry stone dead. Blank cards were stolen from warehouses, personalised cards were stolen from the mail and organized crime was on the scene.

What changed everything was a combination of regulation and technology: regulation that allowed banks to charge higher interest rates and the technology of the magnetic stripe and computer networks for online authorisation systems. This changed the customer experience, transformed the risk management and cut costs dramatically while simultaneously allowing the banks to earn a profit from the business.

(I can’t resist pointing out that it was the London transit system that pioneered the use of magnetic stripes on the back cards. The first transaction was at Stamford Brook station on 5th January 1964, well before BankAmericard introduced their first bank-issued magnetic stripe card in 1972 ahead of the deployment of electronic authorisation in 1973.)

OK, Boomer

So now they are 62, where do these baby boomers go next? When cards went through middle age they bought the sports car of tokenisation and made some younger friends (Apple Pay and GooglePay). But now, as cards approach their golden years, who are the millennials set to inherit the (less profitable) Earth? Many years ago, I saw Anthony Jenkins (the former CEO of Barclays) give a terrific talk at a product launch in which he predicted that mobile phones were going to replace cards long before they replaced cash, a view echoed earlier this year by Deutsche Bank research in their future of payments study. I think they are right, of course, but what exactly will we use those mobile phones for? Instant credit transfers or digital currency? Request-to-pay and Libra transfer or WeChat message with digital Yuan inside? Bank credit transfers or AmazonAMZN credit transfers?

What seemingly failing financial technology experiment of today will change the world a decade from now because of a combination of regulatory and technological change? Click To Tweet

Remember, it took more than a decade for the Fresno drop to turn into the mass market business, integral to the economy, that we know today. So I cannot resist asking you all what seemingly failing financial technology experiment of today will have an impact of a similar magnitude a decade from now because of a combination of future regulatory and technological change? DeFi or Digital ID? FacebookPay or the Lightning Network?

My guess is that will be something to do with digital asset token trading, but I’d be curious to hear yours.

[An edited version of this piece first appeared in Forbes, 18th September 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?

Apple Pay whatever, Apple ID wowza

We’re all familiar with Apple Pay and Google Pay and how much easier (and more secure) they make online commerce. It would be nice if this security were to extended to online interactions of all kinds, not only payments. I think this is not that far away. Apple has recently registered a number of patent claims across the general field of “verified claims of identity” which quite rightly attracted some attention. In July, they filed an application with the U.S. Patent & Trademark Office that describes the technology it is trying to develop to replace traditional driver’s licenses, passports and varied ID cards for government purposes or access to private property. I think these applications are really important and that the fact that Apple wants to control means of presenting and verifying “identity” through devices, including iPhones, is a signal to the industry that the wallet wars are about to heat up.

What's in your wallet?

If I look in my wallet, most of the stuff in there is nothing to do with payments.

If Apple or Google want to replace my wallet, that means that they have to replace my driving licence, my loyalty cards, my rail discount pass, my blood donor card, my AA membership… well, you get the point. And in the real world, I only have twenty or thirty of those cards but in the virtual world I have hundreds if not thousands. Replacing the payment cards was easy. Replacing the identity cards is hard. But in the long term, it’s much more valuable.

It would be nice if the security and convenience of the digital wallets were to be extended to online interactions of all kinds, not only payments. Perhaps this is not that far away. We already use them make online access easier. If I’m signing up for a new services (eg, when I signed up for the New York TimesNYT recently) then I’ll look for the “sign in with Apple” button first and only if the web site does not support it will I then select “sign in with Google” (after first remembering to log in to my “John Doe” Google account). But this is about authentication, not identification. Apple told the New York Times that I am “blahblahblah@blah.apple.com”, not that I am David Birch or that I am over 21 or that I am a UK resident or whatever.

It’s about time, Frankly. The lack of a digital identity infrastructure is big problem in an online world and it has to get fixed whether by governments, financial institutions, specialist players or someone else. Since governments, banks, telcos and others have not fixed the problem (at a level of global interoperability comparable to the internet and mobile phones), it looks as if someone else is going to have to do it.

Since governments, banks, telcos and others have not fixed the lack of a digital identity infrastructure, it looks as if someone else is going to have to do it. Click To Tweet

At the time of writing, Apple are advertising a vacancy in Cupertino for a product manager for identity. The job description posted is for a “top-flight identity product professional with industry experience in physical and digital identity to join us on the journey of replacing the physical wallet”). Maybe Apple is going to be the someone else who is going to deliver mass market digital identity.

They can do it, and I’m hardly the only person to have said this. A couple of years ago here in Forbes, for example, Panos Mourdoukoutas predicted that Apple’s next big revenue source wouldn’t be another device, but the “monetization of the ID Apple assigns to its customers”. This prediction, I should stress, was not especially radical or unusual. Indeed, back in 2016 I was working on the strategic assumption that this was an inevitable direction. I wrote at the time that “it is a very short step from Apple Pay to Apple ID, where revocable identification tokens are loaded into the tamper-resistant hardware”. This was hardly a mystical prediction. I was merely building on the obvious fact that if the “secure enclave” inside an iPhone is safe enough to store payment tokens then it is safe enough to store a variety of the virtual identities that I will need in the online future, having written back in 2015 that if my “Apple ID” provides a convenient mechanism for mutual recognition in person and on line, it will be indispensable in short order.

(Without getting distracted by technical details, it is important to note that what Apple appear to envisage is that a device — such as an iPhone, to highlight the obvious example — will be storing credentials obtained from a variety of sources. My hope is that Apple, Google and others support an interoperable standard — W3C VC, to highlight the obvious example — so the credential providers and users will move to authorisation-based transactions as soon as possible.

So the idea that the platforms might step in and provide the digital identities that will be crucial to our online existence — because banks, governments and others have not — is not what is new. What is new, and why we are talking about identity now, is the coronavirus and the extent to which is has both illustrated the problems caused by not having digital identities and accelerated the drive toward workable solutions. Suddenly we are having to figure out not only how to shop and bank online but how to work, learn, visit the doctor, vote (to pick a very current and contentious example) and access government services online. In the UK, as in the USA, we don’t yet have anything like the infrastructure needed to do this so we end up with costly and imperfect silo solutions.

My point is that we need to put some serious thought into developing a digital identity infrastructure. And we must think about how that infrastructure will evolve and develop. Does the USA want a system as in China where you have a single identity that must be used to do everything and the government knows what you are doing at all times? That has some interesting consequences! For example, for years, the government there has been trying to stop kids from playing too many video games. Now the Chinese have ruled that anyone wanting to play a game must log in using a state-run authentication rolling out this month.

Now, that may be the right way to run a country or the wrong way. That’s not my point. My point is that we need to think about the problem and make some choices about what we want because if you think that digital identity is just about making it easer to log in to your bank, you are wrong. Should the government know that you have logged in to my bank? Should Apple know that I am playing Fornite? Should Facebook know that you are voting online? How exactly can we design an infrastructure to deliver both privacy and security? These are serious questions: Digital identity is the foundation of existence in an online society and choices that are made about how those identities work will be fundamental to how that society is going to work in the future. We need to begin this discussion now.

[This is an edited version of an article first published on Forbes, 29th August 2020.]

International Identity Day

Old MacDonald Had A Retinal Scanner

Well, here we are again. It’s 16th September and International Identity Day (IID) once more*, so I’m here to rejoice with you all. To celebrate this auspicious date, I used my strongly-authenticated virtual identity with the verifiable credential IS_OVER_18 (which is linked to the digital identity stored in my bank wallet) to log in to a French vineyard to pre-order a crate of Beaujolais nouveau. I gave them my Amazon address credential when they wanted a delivery address and my payment name to send their request-to-pay for Amex to digitally sign to confirm payment. My real name and my financial details were never part of this very efficient online purchase.

Not only do we not have digital identities for people, we don’t have digital identities for anything else either. Click To Tweet

I’m joking, of course. It’s actually even worse than you think. Not only do we not have digital identities for people, we don’t have digital identities for anything else either. And that might be more important than you think. After all, we spend a lot of time talking about digital identity for people and speculating about whether Apple ID or federated Bank ID or centralised Government ID is the best implementation but in the new online world, there are a great many entities other than people that will need to have digital identities in order to participate in a functioning post-industrial economy. Things, for example. And artificial intelligences: Bots will need identities, too. In fact I’m writing a book about this at the moment. It’s going to be called “Will Robots Need Passports?” and it will be out next year sometime.

(And the answer, as I am sure you already know, is “yes”. Spoiler alert: robots will need passports because they will need to be authorised to access resources and they will need to be recognised in order to develop reputations that will be transaction enablers.)

What we don’t spend anything like enough time talking about, though, is the digital identity of animals. I read with great interest a report in the Times of India about a new smartphone app that farmers can use to check information about cattle. This was developed in response to an appeal from Prime Minister Modi for a means to reduce cattle theft. As you probably know, India already has a national identity number for people — Aadhar — and it has worked pretty well, providing a low-cost mechanism to establish the unique identities of citizens and thereby contribute to the goal financial of financial inclusion which (as everyone knows) is an identity problem. Therefore, it would seem logical to give animals a number too.

But how do you tell Napoleon from Snowball?

Well, in this case, specific information “unique to each animal” like the footprint, height, weight, colour and tail hair is recorded in the software and a unique ID is generated. As one of the designers of the software notes, this ID “is very useful when insuring cattle”, which is a good point. I am slightly surprised that, all other things being equal, they didn’t put the IDs on a quantum-resistant blockchain in the cloud, but that’s probably version 3.

Nevertheless, the animal Aadhar — the biometric identification of animals and the association of a digital identity — clearly has economic value. I don’t know how unique animal footprints are, so I cannot comment on adjusting the false accept and false reject rates for optimal barnyard efficiency, but I do know that (as the Wall Street Journal recently reported) face recognition for animals is actually pretty difficult. As they put it, “It’s not like you can tell a donkey to stand still“. Quite. Nevertheless it can be done.

IFGS Panel on AI Ethics 2019 (courtesy of Emma Wu).

I know this because I was privileged to have Dr. Jion Guong Shen from JD Digits, a subsidiary of JD (China’s largest e-commerce business) on my panel about AI ethics and governance at the Innovate Finance Global Summit (IFGS) last year. This was a great panel, by the way, largely because the well-informed panellists took the discussion in such interesting and unexpected directions. JD Digits, amongst other things, runs face recognition services for farmyard animals including cows and pigs. It turns out that pig face recognition, in particular, is a big business, There are 700m pigs in China, and the productivity gains that farmers can obtain from ensuring that each pig is fed optimally, that sick pigs are kept away from the herd (and so on) are very significant. Apparently the face recognition system also goes some way to reigning in wannabe Napoleons, as Dr. Shen explained that there are some “bully pigs” that try to obtain a disproportionate share of barnyard resources. The system can spot them chowing down when they shouldn’t be and flag for intervention. This is a pretty straightforward use case for biometric identification that might useful introduced into British fast food outlets in my opinion.

Let’s celebrate International Identity Day by remembering that not only are digital identities are not simply for people and that the future economy desperately needs digital identity infrastructure for everything but that we have a long, long way to go.

* In case you are wondering why IID is 16th September, the choice of the date is in recognition of the United Nations Sustainable Development Goal (SDG) 16.9 which calls for legal identity for all including birth registration by 2030.

Cashless as Count Zero

As I wrote recently, China is well on the way to becoming a cashless society. It is not the only country heading in that direction, of course. A cursory examination of the global statistics around the declining use of banknotes and coins make it easy to predict that many countries will soon be effectively cashless within the strategic horizon of corporate planners. But what does this actually? USA Today jut asked what sounded like a pretty dumb question: will there be cash in a cashless society? Well, I don’t think it’s dumb question. And the answer is “yes”. When I talk about a cashless society within a generation, I do not mean that there will be literally no cash at all. That would be stupid. When I say cashless, I mean cashless in the Count Zero sense.

Cash will still be around and it will still be legal tender (although I don’t think people understand what a limited concept this is), but it will disappear from polite society and from the daily lives of most people. We will move from being a debit card society to a mobile society to a biometric society in which cash will still exist. It it just won’t matter. As the brilliant William Gibson wrote in his 1995 classic novel Count Zero, talking about a character adrift in the near future that “he had his cash money, but you couldn’t pay for food with that” going to deliver my favourite line about cash in the whole of modern fiction: “It wasn’t actually illegal to have the stuff, it was just that nobody ever did anything legitimate with it”.

Psst

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

Why am I focusing on this vision? Well, as my friend and top futurist Ross Dawson points out about Gibson, has never claimed to predict the future [but he] has “an unmatched knack for analyzing trends and behaviors inherent to modern life and extrapolating them into vivid themes that reveal a kind of raw truth about humanity”. He has an amazing track record on this, by the way. As the New Yorker highlights, Gibson first used the word “cyberspace” in 1981 and his books, I have to admit, had a huge impact on me and my way of thinking about technology.

Thus by cashless in the Count Zero sense, I mean that cash has ceased to be relevant to monetary policy, become irrelevant to most individuals and vanished from most businesses. As we look to the future, we can begin to ask, quite reasonably, whether developments in digital payment technology and changes in payments and banking regulation will bring us to the point of this kind of cashlessness within, say, a generation. Well, never mind a generation, we’re pretty close to it now as far as I can see. Let’s just say that if you live in Amsterdam, you don’t need cash for the trains and if you live in London you don’t need cash for the coffee shops. No-one is planning or managing this, it’s just happening.

Is this what we want though? This is a form of cashlessness that is too conservative to reap the benefits of a truly cashless economy, too disorganised to reign in the criminal exploitation of cash and too wedded to the symbolism of physical money to switch it off (just as we switched off analogue TV not that long ago). I think that rump cash (and I exclude various categories of post-functional cash from this definition) should be actively managed out of existence.

We need to have a strategy toward cashlessness, and not simply a laissez-faire acceptance that cashlessness will happen to the great benefit of the majority but in a way that excludes and marginalises some. Click To Tweet

A recent survey in the UK found that over 75% of low-income households rely on cash, as well as over 80% of elderly households. The shift to cashless society must be planned to help these groups so that they share in the benefits of cashlessness. Having been to China and seen at first hand the operation of a cashless society, I think it obvious that we should learn from their experiences, beginning with the observation that people in China are well aware of what happens to when society switches from anonymous cash to electronic payments. As observed in the Financial Times, the “scale of data accumulation is beyond our imagination”. The Chinese woman making that comment — while at the same time observing that despite her concerns about privacy, mobile payments are too convenient to opt out of — goes on to say, rather poetically, that she cannot tell whether her compatriots are “constructing a futurist society or a cage for ourselves”

Not everyone in China is part of this digital currency revolution, of course. The World Bank Global Findex database, which measures financial inclusion, estimates that as of lat year some some 200 million Chinese rural citizens remain unbanked, or outside of the formal financial system. As in Sweden, the shift toward cashless is raising issues around exclusion and marginalisation. There are, for example, supermarkets with different lanes for cash or cashless payments that act as physical manifestation of social stratification between, as Foreign Policy notes, the young and the old and between the urban middle class and those left behind. I’ve written before that we will see the same in developed economies as cash vanishes from middle class life to become the preserve of the rich and the poor who will use it for tax evasion and budgeting respectively.

The response should not be, as in some American cities, to force people to continue to use cash despite the expense, inefficiency and inconvenience, but to find effective digital alternatives for those trapped in a cash economy. I think we should start to plan for this now. I am in favour of Count Zero cashlessness, but I am in favour of it as a policy decision by society that is implemented to meet society’s goals. I couldn’t disagree more with the Wall Street Journal’s view that the move to cashless society “should be left to technological advancement”. No, it should not! This is a matter of great importance and with significant implications for society. The strategy should therefore be set by society, not by technologists.

Now, clearly, technological advances deliver new possibilities to policymakers and it is good for technologists to explore these possibilities. But, as they say, just because something can be done does not mean it should be done. We need a proper debate and a regulatory envelope set out to move forward so that anyone who needs to pay for anything will be able to do so electronically and that anyone who does not want to pay electronically will be presented with a method for paying in cash, albeit one that someone will have to pay for. It’s time to start thinking about what the requirements for that infrastructure are and consulting consumer organisations, businesses and government departments on their needs. We need to make a cashless Britain, not simply allow a cashless Britain.

[An edited version of this piece first appeared in Forbes, 18th August 2020.]