Crypto is new instruments and institutions, not new money

Speaking at the Paris Fintech Forum in June 2021, Francois Villeroy de Galhau, the Governor of the Bank of France, said that there is no such thing as a cryptocurrency, only crypto-assets. I understand what he means. Brett Scott, who is always thoughtful about such things, wrote making a similar point. He said that just as a child trading an action figure for a football (or whatever) “does not undermine the Federal Reserve (which issues dollars that both are priced in)” so “swapping a dollar-priced Bitcoin collectible for dollar-priced goods does not fundamentally alter the structure of the monetary system”.


NFT available direct from the artist at TheOfficeMuse (CC-BY-ND 4.0)

I have to say, I agree with them. While some people (quite rightly, in my opinion) saw Bitcoin as more of a protest movement than a viable alternative to the Bretton Woods world and while other people saw it as a replacement for a rotten the international money and financial system, I’ve been pretty consistent in my view that Bitcoin (to take the obvious example) is not money but a new form of digital asset that might, in certain circumstances, exhibit money-like characteristics.

In the very early days of Bitcoin, I met a number of people who saw crypto-assets as the basis for an alternative system of money and finance, a kind of trustless base layer for a universal “internet of value” that would sweep away the sclerotic institutions of global corporatism and unleash a new wave of capitalism. These people often talked about a new gold standard, although I’m not sure why, because society had long ago decided that a gold standard was not the best way to run modern economies. I don’t see any evidence that this alternative system is emerging. On social media we see what Concoda calls “ a non-stop stream of ‘freedom porn’” yet in reality the crypto-asset markets are thin, opaque and manipulated.

So if it is not money, what is it for?

Crypto Choices

In other words, why do people buy and sell crypto? I have often wondered whether most people dabbling in the leading cryptocurrencies see it as a protest movemement, an alternative financial system, digital gold or something else and now the question has been answered. The Bank for International Settlements (BIS) Monetary and Economic Department have just published a working paper (no. 951) Raphael Auer and David Tercero-Lucas called “Distrust or Speculation? The Socioeconomic Drivers of U.S. Cryptocurrency Investments”, which is a fascinating analysis of the market drivers in that space. What they find, using data from the U.S. Survey of Consumer Payment Choice, is that there no evidence at all that (despite the cacophony on Twitter and the ranting observed at cryptocurrency gatherings) cryptocurrency investors are motivated by distrust in fiat currencies or regulated finance. None. In fact crypto investors (speculators?) are no different to the general population with respect to security concerns over cash and commercial banking services.

Ultimately, then, people trade crypto-assets because (as David Gerard has consistently observed) “number go up”. This is essentially a post-modern digitally-turbocharged version of the greater fool theory that all you need to profit from an investment is to find someone willing to buy the asset at an even higher price, no matter whether the asset is worthless or not. A friend of mine, who recently made tens of thousands of pounds from buying and then selling a single NFT told me (I paraphrase) “maybe someone understands this, but I don’t”.

Future Markets

The crypto-asset market just like any other market. This is an important and serious conclusion of the BIS work, which implies that since the objectives of investors are the same as those for other asset classes, so should be the regulation. Cryptocurrencies are not sought as an alternative to fiat currencies or regulated finance, but instead are a “niche digital speculation object”. Quite. This is why I have always been much more interested in the world of digital assets, tokens and decentralised finance than the cryptocurrencies themselves. From this perspective, I can see that Circle (going public through a SPAC with a $4.5 billion valuation) makes sense: they provide the market with a token, the USDC “stablecoin”, that can be used in decentralised finance markets to execute trades through smart contracts. This has real utility and a window into a future of markets in which bots engage in complex trades around instruments that are too complicated for human traders to understand!

The crypto-asset market just like any other market. Click To Tweet

Unfortunately, the last time we let human traders loose on instruments they didn’t understand (mortgage-backed securities) they blew up the financial system. So what’s to stop the bots from doing the same? Well, it may be that we can make bots follow rules, whereas we can’t make human traders behave ethically no matter what the sanctions. I was interested to read in the BIS report that one “promising option” for supervisory and regulatory agencies to pursue is what the authors refer to as “embedded supervision”. In other words, embedding the supervisory framework for the trading of digital assets in the smart contracts themselves. This is a useful confirmation of the applicability of “ambient accountability” — a concept set out in detail in a paper by Richard Brown (now CTO of R3), Salome Parulava (then with Consult Hyperion) and me in our 2016 paper for the Journal of Payments Strategy and Systems — and reinforces the value of my “glass bank” metaphor for a more transparent and stable financial system.

Just to be clear, by the way, I am not saying that because as crypto-assets aren’t currencies they are not useful. Quite the contrary. In this respect I agree with the economist Tyler Cowen, who said in a recent podcast that “I don’t think of crypto as a currency. I think of it as a new set of institutions”. If these institutions can reduce the costs of financial intermediation (largely by reducing the costs of regulation, compliance and auditing) then they will make a very significant contribution to improving the lives of all.

(An edited version of this article first appeared on Forbes, 12th July 2021.)

Crime and cryptocurrency, frauds and fungibility

The recent devastating ransomware attack on Travelex has once again raised the issue of cryptocurrencies, or more specifically Bitcoin, being used for criminal purposes. At the time of writing, my bank (Barclays) as well as other high-street banks including HSBC, Virgin and Tesco Bank, all of whom rely on Travelex for foreign exchange services, are still unable to offer online exchange services or process orders for foreign currency. The company was infected with a “ransomware” virus that encrypted its data — Travelex left critical security weaknesses in the Pulse Secure virtual private network (VPN) servers unpatched for eight months — and the attackers demanded a $6m payment in Bitcoin to decrypt the data.

(Travelex has not disclosed whether it has paid the ransom.)

The scale of the damage here may have been unusual, but the attacks are not. Every single day there is another such story in the media. And while none of us may care that much if financial institutions do not implement appropriate security and have money stolen, there are attacks on hospitals and public services all of the time as well. Perhaps we ought to consider following the lead of Finland. Back in November 2019 more than 200 Finnish municipalities and public organisations had a “war game” co-ordinated by The Population Register Centre to practice their response to possible cyberattacks. I am not an expert, but I imagine that one of the things they learned was to make sure that the IT people install security patches on their computers and to make sure they have backups of their data, but I digress.

Back to the issue of ransoms. Ransomware wouldn’t be much good if the attacker could only be paid by cheques or bank transfers. This is why ransomware and cryptocurrency are a package, although ransomware datanappers are not the only criminal users of the new digital dosh. According to the Daily Mail, the police have seen an “explosion in the use of digital currency by criminals who are strolling into cafes, newsagents and corner shops to dump their ill-gotten gains in virtual currency ATMs”.

Well, let’s not panic. If you look at the actual Bitcoin transactions going on out there in cyberspace, you’ll have to admit that even crime isn’t proving the vehicle for mass market adoption that the more hysterical parts of the media might have made you think. Frankly, if the demand for Bitcoin were all about crime (and not speculation) then it would actually be worth far less than it is today. There just isn’t enough crime. Calculations based on the use of Bitcoin in this sector of the economy put its value at something like one-twentieth of the current price.

Now, I have to say that I think that these kinds of calculations are highly spurious.

First of all, such calculations are often based the value of the global market in illegal drugs. Now, while no-one can be sure of the exact size, this is undoubtedly a vast market. But it is a market that is conducted almost entirely in cash. Were these transactions to be converted to digital money, the sums involved are so vast that it would be almost impossible to create to an AI machine-learning transaction monitoring services to ignore them.

Secondly, I have yet to see any evidence that criminals are adopting Bitcoin at scale for anything else. And the reason for this is obvious: it’s not anonymous enough. Wallet addresses are pseudonyms, and once any of these pseudonyms has been linked to a mundane identity in anyway, the identities can be connected, monitored, tracked and traced. While people often refer to bitcoin as anonymous, it really isn’t. 

Why Bitcoin?

It can be made anonymous, though, right? In the world of bitcoin, smart criminals will use “mixers” or “tumblrs” that jumble together Bitcoins to obfuscate their origin. Well, whatever. If Bitcoin were to be widely used in serious criminal enterprises then the authorities would step in. What if law enforcement agencies go to the biggest miners in the world and tell them that if they continue to confirm easily identifiable mixing transactions, they will be accused of money laundering? As I write, 49% of all of the Bitcoin “power” is in the hands of five Chinese mining pools, so this is not difficult to imagine. Bitcoin’s fungibility means that it has little long-term prospect for criminal enterprise.

Wait! Whatibility?


Whatever Bitcoin is, it isn’t cash for the inescapable reason that cash is fungible. This matters. Remember that IRS Ruling about Bitcoins being a commodity, so that traders would have to track the buying and selling price of each individual Bitcoin in order to assess their tax liability? No? Here’s a reminder from [CreditSlips]: “For a payments geek, the real lesson from the IRS Bitcoin ruling is that for a currency–or any payment system–to work, its units must be completely fungible”.

Fungible (from the Latin “to enjoy”) is a great word. One of my favourites, in fact. In this context, money, it means that all tokens are the same and can be substituted one for another. You owe me a pound. It doesn’t matter _which_ pound coin that you give me. Any will do. Any pound coin can substitute for any other pound coin because they are all the same: no-one can distinguish one pound coin from another. This isn’t true of Bitcoins. They are all different. and because they are all different, their history can be tracked through the blockchain, its immutable public record of all transactions.

The existence of the blockchain means that clever analysts can set their bots scampering along the chain of transactions to find out where money is coming from and where it is going. While Bitcoin has a media image of secrecy, it has long been understood that blockchain analysis means that it could be surprisingly easy for a law enforcement agency to identify many users of the currency [MIT Technology Review]. So you can what is actually going on at all time. If you want to get a picture of Bitcoin’s role as the currency of crime, a good place to start is the Chainalysis report on “The 2020 State of Crypto Crime”. Chainalysis, founded by Jonathan Levin, have sophisticated tools for cyber currency transaction monitoring and are used by the FBI and such like to track down miscreant moolah.

Bitcoin isn’t fungible (unlike the £50 notes so helpfully provided to the criminal fraternity by – yes, couldn’t make this up and I will call the Daily Mail in the morning – it’s only the Bank of England wouldn’t you know it) which means that the money can be traced from wallet to wallet and that should make it easier for these detectives to get a handle on where the ill-gotten gains are heading. 

The lack of fungibility has major implications for criminals. We have just the English High Court (in the decision of AA v Persons Unknown & Ors, Re Bitcoin [2019]) determine that crypto assets such as Bitcoin are considered to be ‘property’ capable of being the subject of a proprietary injunction against a cryptographic exchange, which was indeed granted. You can see what is going to happen here: the exchange will be required to identity who owns the stolen coins and the owner will then be the subject of legal action to recover them. This owner might be entirely innocent about the origin of the coins and will say that they didn’t know that the Bitcoins they bought are the proceeds of a ransonware attack and may ask to the keep them. But, as the economist J.P. Koning points out, that’s not how property law works. Even if you accidentally come into possession of stolen property then a judge can still force you to give them back to the rightful owner.

(To recap. Bitcoin isn’t cash, because cash is fungible. If we want something to be cash, we need to make it fungible. But do we want cash? I’m always ready to listen to informed views. If you do too, then someone you should listen to is Adam Back. He is a brilliant guy. He has already forgotten more about cryptography than I could conceivably learn from now on if I dedicated the entire rest of my career to the topic. His masterful lecture on “Fungibility, Privacy and Identity” delivered to Bitcoin Israel is well worth 90 minutes of your time. Get a notepad, a cup of tea, packet of fruit shortcakes and fire up the video.)

What happens when they get anonymous on our asses?

This is why ransomware rogues convert their Bitcoins out into something more suited to the less-regulated corners of the economy. The people behind the famous “WannaCry”, which hit more than 300,000 computers in over 150 countries, took their rewards and converted them into Monero, a privacy-focused cryptocurrency that has seen some growth in its popularity over the last year or so. This, in turn, makes me wonder why criminals continue to use a payment mechanism that leaves behind a perpetual record of all transactions that anyone can look it, particularly when there are more private alternatives already in the wild. One such example is Zcash, a cryptocurrency with the added special sauce of genuine anonymity rather than the pseudonymity that, as noted, hampers the exploitation of Bitcoin for nefarious purposes. Transactions remain confidential unless the counterparties reveal their addresses by “selective weakening” of the cryptographic protection. Now, I am sceptical about whether confidential transactions will get much traction in the mass market, but that does not mean that advocates of Zcash do not have a point when they say that “If you start with a perfect electronic cash system building block, then you can build an electronic cash system with selective weakening in a way that makes sense for society” [IEEE Spectrum].

You can understand why, of course. An electronic cash system that is going to offer some forms of privacy must be built on a truly anonymous infrastructure. You can’t do it the other way round. But… a truly anonymous infrastructure provides ample opportunities for mischief and some of this mischief might be of significant harm to society as whole. So what will happen?

In Zcash, there are two types of addresses, “transparent” and “shielded”. The transparent addresses and the amounts sent to and from them show up on the blockchain as they would in bitcoin. But if a user opts to use a shielded address, it will be obscured on the public ledger. And if both the sender and receiver of funds have opted to use shielded addresses, the amount sent will be encrypted as well [American Banker].

(The idea that counterparties can choose whether a transaction is visible or not is interesting and under explored. This reminds of the idea for light transactions and dark transactions that artist Austin Houldsworth put forward and that we presented at the BCS back in 2012!)

Trying to think this through, it seems to me that there is something of a paradox here in our mental transaction models. We want our transactions to be anonymous because we are good people but we want other people’s transactions to be tracked, traced and monitored because they might be criminals. Obviously we don’t want child pornographers and terrorists to have access to anonymous electronic cash but we do want freedom fighters and oppressed minorities to have access to electronic cash.


So how might this paradox be resolved? Well, one option might be to assume that the anonymous cash will be used primarily by criminals and possession of it will be taken to be prima facie evidence of criminality, but not to ban it because free speech trumps crime according to our cultural values. Thus law enforcement resources can be targeted. Remember, in an anonymous world no-one knows you’re a dog but no-one knows that you’re from the FBI either. Hence you could argue that anonymity can actually help law enforcement to carry out old-fashioned police work (and since no-one knows you’re a bot either, I’d assume that the police will have large-scale big data analysis and pattern recognition and machine learning and all sort of other things to help them). It’s not at all clear to me that a terrorist child-pornographer will be any further beyond the reach of the law because their cash is anonymous when their mobile phone location is recorded every 50ms and their face is scanned at every street corner, but I’m open to debate.

In the mass market I can therefore envisage an environment where some kind of anonymous cash is in existence but is never used in its “raw” state, because people, companies and governments will only use the privacy-enhanced layers on top of it. Getting your ransomware cryptocurrency might remain easy, because companies don’t do proper risk analysis and don’t design secure products, but spending that cryptocurrency might become increasingly difficult.

OK, I promise, no more Bitcoin analysis

I have a fundamental character flaw, which means that I cannot resist making snarky points on Twitter through the use of oblique satire. In particular, as some of you may have noticed, I cannot resist poking fun at Bitcoin astrologers by tweeting purported explanations for Bitcoin price changes together with my own recommendations. Here’s the last one I posted… 

Just to be clear: this is utter nonsense that I made up in a few seconds, except for the recommendation, which is always real (from a poem, a song, a Bible verse, a famous quote or wherever). Here’s another example from earlier in the year which I just came across while searching for something else. I saved because it is special. 

Now, this tweet is utterly random (again, except for the Latin motto at the end: I googled for that). The point I am making is that this analysis is factually equivalent to any one of millions of reports from analysts about why Bitcoin is going up or down and whether you should buy or sell. Other than the rampant manipulation of a thin and opaque market, there are no fundamental reasons for the Bitcoin exchange rate to go up or down. As David Gerrard is fond of saying “because… number go up”.

Anyway, I made that tweet up in about 12 seconds by looking at the BBC News homepage. It is meaningless garbage. So why is it special? Well… you can imagine my surprise when I was contacted by a journalist asking if I could be interviewed for a cryptocurrency podcast*. I was very tempted but decided it would be dishonest to propagate fake news when I spend so much time complaining about it.

I contacted the journalist and explained that it was garbage that I’d made up. The journalist replied with good grace and said that my “appearance of wisdom” had fooled them. I liked this phrase so much that I wanted to change the name of this blog to it, but I decided that 15Mb is more obscure, so I’ll just make it my Twitter name for a while instead.

And no more Bitcoin analysis!

(I wanted to tell her that my basic knowledge of management consultancy meant that I could have provided a spreadsheet and a Powerpoint deck to back it up, but decided not to pull back the curtain on one of our vital industries.)

*Please note: this actually happened.

Ten more years

We’ve just had Bitcoin’s tenth birthday, so like most other electronic payment aficionados I’ve been mulling over the trajectory of the noted peer-to-peer electronic cash system. My interest in it goes back long way. I was  invited to speak to the first European Bitcoin conference in Prague back in 2011 having previously given perspectives on the project — in blogs, magazines and even on BBC radio — that were not especially enthusiastic. As an example, in Prospect Magazine back in 2011 I wrote “while many of us would like currency management taken away from governments, that doesn’t mean an unmanaged solution will be any better”.

That Prague conference was therefore an opportunity for me to learn more about Bitcoin and the Bitcoin community as well as to test my arguments with an informed crowd. My views didn’t change – I still didn’t think Bitcoin would crack the mass market – but looking back on it now is a fascinating slice of early Bitcoin life.

In the first presentation, Sergey Kurtsev from IMCEX said that anonymity is misunderstood and that the public don’t need it. I was upset about this, not because he was absolutely correct about it, but because it was going to be the subject of my talk in the afternoon. So it led to some emergency last-minute Keynote acrobatics on my part!

Amir Taaki from the Bitcoin Consultancy gave a presentation that was quite wide-ranging so I will use that presentation as a peg to hang a few comments on. He said, essentially, that there were three problems with Bitcoin: the marketplace, the technology and finance.

  1. Marketplace. Amir said that consumers had no reason to use Bitcoin because attributes that Bitcoin projects (such as that anonymity) are not valued by consumers and the merchants obviously don’t see enough value to drive consumers towards it. I don’t see that anything has changed in the last decade. As I pointed out in 2015, if there’s no demand for Bitcoin for porn, then there’s no future for it as a means of exchange!

  2. Technology. There were scale issues, as people much cleverer than me (e.g., Ben Laurie) pointed out at the very beginning, but the key technology issue was that it was hard to use. Now it’s a bit easier because you have a variety of Bitcoin wallets to choose from.

  3. Finance. Amir made a point about “compromising events”. He said that if you want people to hold Bitcoins instead of dollars or gold, they have to have real faith. Every time they read about exchanges crashing and money vanishing that becomes more unlikely. As I have posted with wearying repetition on Twitter across the last decade “help I want my anonymous, untraceable digital cash back!”.

When it came to my talk (which you can see below), I did try to make constructive criticism. I tried to highlight some areas of commerce where the existing mass market solutions might be vulnerable to well-crafted alternatives (e.g., social networking, games, kids) or where a significant improvement in security would generate value.


( I also emphasis, as I recall, that any realistic mass-market solution must be mobile-centric.)

Overall, as I’d previously written, I was unconvinced that Bitcoin would make a good currency or scale into the mainstream economy, mainly because the anonymity that was the attractive feature to the early-adopting bitcoiners was not attractive to the mass market. I still don’t see any traction for Bitcoin in the mass market. Back in 2015, I set off to visit Swindon on the 20th anniversary of the launch of the UK Mondex scheme (an offline, smartcard-based form of electronic cash) and discovered a shop advertising that they accepted Bitcoin. But when I attempted to pay with Mr. Nakamoto’s peer-to-peer electronic cash system, no-one could remember the password and when I asked to speak to the manager, he told me that no customer had ever asked to pay with Bitcoin anyway. 

Bitcoin at POS in Swindon


(Swindon, once twinned with Disney World, is the epicentre and bellwether of the transition to new forms of money. In two decades it went from a place where no-one used Mondex to a place where no-one used Bitcoin.)

More interestingly, with the perspective of hindsight, a couple of the speakers at the event suggested creating a scheme on top of Bitcoin rather than use Bitcoin itself, which to my mind adumbrates the evolution of the token, which I do think has more chance of success. I wrote about this last year, saying that I see Bitcoin and its cousins not as prototypes but as a base layer that will be used by some, but not by most, people to make real transactions in the future. I think most transactions will take place at the token layer, exchanging bearer assets over an efficient (no clearing or settlement) transaction layer.

So the blockchain is new and so on… and yet… the idea of a trading “money like” instruments without clearing and settlement is hugely appealing. This not on idealogical grounds but on economic ones: it’s cheaper.

Whether the transaction layer underneath will be Bitcoin or not is anyone’s guess, although I suspect it will not. If the function of the transaction layer is to be a global, shared resource for security infrastructure then the protocol will surely need to be optimised in that direction and the operations will surely need to be organised in such a way as to prevent any well-funded (at the National State level) attacker from being able to control sufficient of the necessary resources to subvert or disrupt that infrastructure. No-one is going to move their stock market over to a platform where trading might be disrupted by crypto-kitties.

Oh no, not “legal tender” again

Oh well. Just had another pointless argument about cryptocurrency and legal tender with someone in another context. The argument was pointless for a couple of reasons…

First of all, the argument was stupid because the person I was arguing with didn’t know what “legal tender” means anyway and, as I’ve already pointed out, it doesn’t mean what a lot of people think it means. Let’s just have a quick legal tender recap, using the United States as the case study. Section 31 U.S.C. 5103 “Legal tender” states that “United States coins and currency [including Federal reserve notes and circulating notes of Federal reserve banks and national banks] are legal tender for all debts, public charges, taxes, and dues”. Here is chapter and verse from The Man commenting on what that means: “This statute means that all United States money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise”.

TL:DR; The Man says no-one can force you to take dollar, dollar bills. 

Secondly, the argument was stupid because the person I was arguing with hadn’t bothered to fact-check the story that they were arguing with me about in the first place. It was to do with this story, supposedly noting Bitcoin’s status in Japan saying that “in Japan bitcoin core (BTC) is ruled legal tender and is already used to buy everything from airline tickets to sushi”. This is, as you may suspect, is completely false because in Japan the Virtual Currency Act defines Bitcoin (and other virtual currencies) as a form of payment method and not as any kind of legally-recognized currency or legal tender.

TL:DR; Bitcoin is not legal tender in Japan, nor anywhere else for that matter.

Nor, I strongly suspect, will it ever be. So let’s put that to bed and ask the more interesting question as to whether a central bank digital currency (e$, for short) would be legal tender. Here, I think the answer is unequivocal: yes, and in unlimited amounts, because there is no credit risk attached. A transfer of e$ is full and final settlement in central bank money and in time Section 31 U.S.C. 5013 will undoubtedly be extended to say so.

The Bitcoin rule of thirds, and what Bitcoin tells us about the future of money

In my presentation to Seamless Payments in Australia, I made reference in passing to the nature of the Bitcoin universe and how informs thinking, so I thought I’d take the time to explore that thinking in a little more detail to explain my comments.

I don’t have the exact figures to hand, but as I understand it the Bitcoin coinbase breaks down roughly into thirds…

 A third of them are lost (well, last year 23% but I think it will get worse as more people forget their passwords). This is because (like me) someone wiped their old phone wallet away and forgot to transfer it over to their new phone wallet first or because they accidentally threw away the old hard disk with all the Bitcoins on them or because the dog ate the Bicoin cold wallet or because they died or whatever. As Jonathan Levin of Chainalysis, who I regard as the “go to guy” for tracing Bitcoins, told NPR in January: “For the people that have lost their bitcoins, I say tough luck”.

(These lost Bitcoins, as my good friend Steve Bowbrick rather eloquently observed, are like treasure in sunken galleons waiting to be discovered by an intrepid explorer in the very latest kind of submarine. Which, in this instance, would be a quantum computer. It’s not only Bitcoin tucked away in these sunken galleons, by the way. There’s half a billion dollars in Ethereum stuck in just one Ethereum address: it’s the address “0”, essentially. In July 2016 someone accidentally sent ETH 1,493, currently worth more than a million dollars to that address. And thanks to the magic of the cryptography, it will stay there until the quantum submarine can uncover it.)

Another third of the Bitcoins are in the hands of the .0001%, the cryptoscenti. Bloomberg estimated that a few hundred people at most own these Bitcoins, but I’ve heard estimates that fewer than 50 people have the lion’s share. These are the people who have every interest in driving the value of Bitcoin higher so that they can cash out at a steady rate. If they dump their coins, that will drive the price down (a row has just been going on about the sale of the Mt. Gox assets for this very reason), so they need a rising market where they can convert Bitcoin to one Lambourghini at a time.

Meanwhile the other millions of Bitcoin peasants scrabble for their share of the remaining third. This distribution makes America look like a kibbutz in comparison and stands testimony to the deranged nature of utopian projections around this “digital gold” for the masses. So, to get to the question that I was asked on Sky News a few weeks ago, what does the Bitcoin market tell us about the future of money?


I’m not sure that the state of Bitcoin, or indeed the history of Bitcoin, tells us very much about the future of Bitcoin or money. It’s not anonymous enough for criminal enterprise on a large scale (and there is every evidence that criminals are turning to crypto alternatives) and it’s not functional enough to be a mass-market medium of exchange. If it is to remain a store of value beyond speculation then it must be useful for something and I’m at a loss as to what that something might be, although I’m perfectly prepared to believe that it’s because I grew up in an era of chip and PIN cards and ApplePay.

Does that mean that we should ignore it? No, of course not. There are many different ways to look at Bitcoin and it deserves study as a much as a social and political phenomenon as it does as a technological and economic one. What’s more, it does tell us something about the future. In yesterday’s Financial Times, Benoît Cœuré and Jacqueline Loh from the Bank for International Settlements (BIS) said that “while bitcoin and its cousins are something of a mirage, they might be an early sign of change, just as Palm Pilots paved the way for today’s smartphones“.

Values, Tokens, Accounts

I agree, but in a slightly different way. I see Bitcoin and its cousins not as prototypes but as a base layer — as shown in this “thinking out loud” picture that I’ve been using to explore these ideas — that will be used by some, but not by most, people to make real transactions in the future. I think most transactions will take place at the token layer, exchanging bearer assets over an efficient (no clearing or settlement) transaction layer. And most of those transactions will be pseudonymous, but some will be linked through accounts to people and organisations. 

Seamless Sydney

So what can we guess about the future of money, given what we have learned so far? Well, as I said in my Seamless Payments presentation what we may have learned is that the token economy is a more accurate pointer toward the future of money than the underlying cryptocurrencies are, because the tokens link the values managed on shared ledgers to the “real world”. There’s a logic to this model of “the blockchain” as the security infrastructure for a token economy and I really enjoyed engaging with the good people of Sydney on this view of the emerging cryptoeconomy.

Back to the future of Bitcoin

I was very excited to discover via the interweb tubes that Bitcoin is now going into geostationary orbit. In the near future, Bitcoins will be dropping as a gentle rain from heaven. Well, sort of.

Blockstream Satellite is the world’s first service that broadcasts real-time Bitcoin transactions and blocks from a group of satellites in space.

From Blockstream – Announcing Blockstream Satellite

You cannot imagine the nostalgia this story generated for me because, astonishing as it may now seem, the first ‘fintech’ project that I ever worked on involved using satellites to transit financial data and the first book chapter that I ever wrote was about the use of satellite data for business.

Settle down youngsters, and I’ll tell you the tale…

Cast your mind back to 1982. Those interweb tubes are a distant dream. Getting data from place to place is a major effort. In a far away place (Indonesia) a group of talented 10x prima donna programmers are writing software to run on the world’s first regional satellite data system, the Palapa-B1 service (a Hughes HS376, for the technical, with 24 C-band transponders). In the great city of Bandung, one of these dashing young software engineers — me — was initially tasked with writing the (and here’s one for the teenagers) X.28 code and then the X.25 code to allow (amongst other things) bank terminals and other devices to connect via this new satellite network to allow communications between bank branches on far flung islands throughout the Indonesian archipelago and bank offices in Jakarta and elsewhere. You couldn’t buy communications software for the processors we were using. You had to write it from scratch. If you tell the young people of today that, they won’t believe you.

Indo83 3

We were working at a telecoms supplier’s site in Bandung. I know it doesn’t look much from the outside.

A Japanese team were building the baseband modems and implementing the Aloha link protocol that had originally been invented for Alohanet. This gave me the assembly language primitives to work with to implement the CCITT protocols on top. X.28, as if you need any reminding, was the protocol for character input/output (used to connect terminals across a network to mainframes) and X.25 was the packet-switching protocol for interconnecting computers. I still think of terminals at DTEs (Data Terminating Equipment) and I still think of network connections as DCEs (Data Circuit Terminating Equipment). All of these quaint terms vanished from the pages of history about a week after TCP/IP was invented.


As you can see, inside we had access to many modern facilities.

Implementing X.28 meant that staff could log on to bank mainframes using terminals in the branches. Implementing X.25 meant that remote minicomputers could interconnect. Getting the code to work, and getting it to work quickly enough, and getting it to work in the limited memory available was a fantastic education. I loved my time as C ninja, interfacing with what was then leading-edge communications hardware to deliver data services to real users.

Indo83 2

Here I am making a few small adjustments to the communications processors boards.

It was here I learned all my UNIX tricks and C programming stunts. Those were the days when if you didn’t like the way that the team wrote code you could quickly knock up a parser to force them into line (which one of my colleagues did, using YACC), when you had to pretend to the system administrator that you didn’t have root access (which we all did) and when the disk packs held 5Mb so you had to be very careful with the space available *wipes away a tear*.

Indo83 1

As you can see, the team really appreciated my mad programming skills and their contribution to the great success of the project.

In the later 1980s and very early 1990s, I enjoyed working on a wide variety of projects around satellite data communications. I worked on technical architectures, system designs and even on regulation in a team with the now-infamous Vicky Pryce (who was then chief economist at KPMG, and who I remember as a very impressive and really clever, but also really nice person). The very first conference paper that I ever wrote was on the use of satellite data broadcasting to deliver stock exchange data to market participants and I spent happy days at Telekurs, Dow Jones Telerate, the London Stock Exchange and other places working on link budgets, low-noise blocks and forward error correcting codes (this is where I learned about convolutional coding and Viterbi decoders. One of the most interesting areas I worked in was the use of Vertical Blanking Interval (VBI) data services embedded in analogue television transmissions and the potential (abandoned) use of data space in digital television transmissions for value-added (largely financial) services.

Books about satellite communications

A few years later, I worked on a similar system using Very Small Aperture (VSAT) terminals in K-band (too much information, ed.) for a US telecommunications provider, on one of Consult Hyperion’s first US projects. In those still pre-internet days, if you wanted to get data from a branch office back to HQ reasonably quickly you had to pay for a leased data line from the phone company, which was very expensive. Putting a satellite terminal on your roof was a cheaper alternative and as the frequencies went up from C- to Ku-based, so the dish sizes and costs came down. The cost of installing and maintaining a six foot dish compared very favourably with the costs of alternatives, until the internet and mobile phones came along and spoiled all the fun.

Ah, the good old days.

The official blockchain quatrain

The moving finger writes; and having writ

Moves on; nor all your piety nor wit

shall lure it back to cancel half a line,

Nor all your tears wash out a word of it.




OK, I added the hashtag, but the rest is from Edward Marlborough’s 1859 translation of the Rubáiyát of mathematician, astronomer, philosopher and poet Omar Ahayyám (1048-1131).