The future of money? Back to social anthropologists again

In my book “Before Bablyon, Beyond Bitcoin” I made the point that I had turned to the work of social anthropologists to help me to make sense of the impact of new technology on money and the relationship between social, economic, business and technological pressures on the various functions of money. I found the perspectives of the discipline indispensable in formulating scenarios for the future that would be useful for banks and others developing their strategies. This is why I was absolutely delighted to be invited to the European Association of Social Anthropologists (EASA) Annual Conference 2020. I’m going to take part in Panel 057, “Digital encounters, cashless cultures: Ethnographic perspectives on the impact of digital finance on economic communities”.

This panel explores new approaches towards value, economy, money, debt, finance and fiscal relations. In doing so, it discusses how global turns towards digital finance (e.g. mobile wallets; credit and debit cards) impact cash dependent and marginalized groups, communities and families worldwide. In particularly interested in following the narratives around these issue because, as I have long maintained, we need to being to develop strategies toward cashlessness rather than simply allow cashlessness to happen and we need to develop strategies for bringing new kinds of money into existence to serve society more effectively than the current international monetary and financial system does. I am not smart enough to know what all of those strategies should be, although I am smart enough to know that they require knowledge that it far beyond that of the technology and the business model, so I am genuinely keen to learn.

Just to show the variety of topics that will be discussed, here is the list of papers in the session:

  • Economy of lies: Drunk husbands, digital savings and domestic workers in Kolkata, India.

  • Cutting the wire: financial exclusion and online work among Syrians in Lebanon.

  • Debt economies as urban survival strategies in the collapsed economies: examples from post-Soviet economies and Turkey compared
    Spheres of exchange 2.0: Conversions and conveyances in Bitcoin economy.

  • Accessing Cash(lessness): Cash-dependency, Digital Money and Debt Relations Among Homeless Roma in Denmark.

  • Self-making stories: Accounts of cryptocurrencies from the ground
    An ethnography of unsettled debt. Cashlessness and betrayal in Brazil.

  • An ethnography of Italian Bitcoin Users.

  • Coercive Political Economies, the Anthropology of Risk and Social Financing. Ethnographic notes from North India (Rajasthan).

  • Banking on digital money: Swedish cashlessness and the fraying currency tether.

The authors of the papers in this session have produced a series of blogs that explore a fascinating variety of perspectives on money and what it means, from financial inclusion and cashlessness to risk and cryptocurrencies, that will certainly add significant input to the debates that I am involved in around digital currency. In particular, the social anthropologist perspective will help me to explore the key question of whether digital currency will be driven forward by evolution or intelligent design. Are we going to use new technology merely as a band-aid to cover up the flaws in the existing system or are we going to do something different?

(Ozark Series 3, Episode 1. Mom “Mining virtual gold isn’t a real job”. Son “You know that all money is imaginary, right?”)

J.P. Koning came up with a lovely way of thinking about this, with the added bonus of evocative imagery and a core analogy that holds true: money is indeed imaginary. As he put it, “Like Inception, our monetary system is a layer upon a layer upon a layer… Monetary history a story of how these layers have evolved over time”. Great movie, with the wonderful line “yes, but how did you get here”. Physiology recapitulates phylogeny, as they (used) to say. In other words, the structure of the monetary system shows its evolution, just like our knees do. It did not arise by intelligent design. In fact, quite the contrary: it demonstrates some pretty unintelligent design on a daily basis (like having people instruct speed of light instant payment transfers by typing in account numbers and sort codes).

Things, however, could be about to change. Suppose that we apply intelligent design to create forms of money that are grounded in a world of mobile phones and shared ledgers and such like to operate in a fundamentally more efficient way.? Then what would that money look like? That’s precisely what we should be listening to social anthropologists about! In intelligent design, we ought to start out by deciding what is best for society as whole rather than what is best for (say) banks. We want to have regulations that are good for society but we do not want regulations that are expensive, beyond cost-benefit analysis and a burden on stakeholders. Nor do we want regulations, as we have now, that have spiralling costs with no end in sight. We might ask, for example, in the case of America whether it makes sense to have one virtual currency regulator or 50?

In this case the current sub-optimal situation is, I would imagine, a byproduct of state regulation of banks and it perpetuates because regulators at the state level mistakenly imagine money to be something to do with banking. And, I suppose, they are currently underemployed, what with everything being so stable and efficient in the financial services world. Our first step to a better system, then, is not based on fintech but on regtech and  co-ordinated efforts to make ‘sustainable asset classes more investible at lower cost’. If we look at the patten of the co-evolution of money and technology what we see (yes I know this is a gross simplification) is a history of sustainable asset classes as a mechanism for deferred payment that in time become a store of value and then a means of exchange. The means of exchange then becomes a currency that denominates other transactions.

If that is a useful model to work with, then what would these assets be? In the article referenced above, Richard Roberts goes on to identify candidate currencies based on “flows”, which is a useful way of thinking. He points to four key flows — you could also think of them as currencies — that he believes will underpin the next economy: money, data, carbon and genes. This accords with another perspective that I have written about before, the Long Finance perspective. In Gill Ringland’s examination of plausible financial services scenarios for 2050, she talks about the key assets being a person’s identity, credit rating and parking space (alluding to a new demographic asset class of residence). I think that there will be many more currencies, because I see currencies linked to communities, but I agree with the general thrust, so let’s imagine that there is a framework in place for creating the currencies (a privacy-enhancing framework with all sorts of goodies such a homomorphic encryption and zero-knowledge proofs baked in to it) and that it has been intelligently design to meet the goals of society.

Now this is where fintech (in the form of digital assets that can be traded without clearing and settlement) comes into things, by answering some of the questions and solving some of the problems set out by the authors in my EASA session. Not the problem of helping college kids in San Francisco to split a bar tab without talking to each other, the problem of helping everyone (and I mean everyone) to better financial health though better management of assets. One way will be to turn investible assets into money (or, at least, new kinds of assets that function in money-like ways in certain circumstances). This seems to me to be a much more realistic vision of the future than the “Star Trek” alternative, even though I do enjoy that version:

One of my favorite moments from Star Trek is in ST IV: The Voyage Home, when Kirk and the gang are stranded in 1980s San Francisco. They try to board a Muni bus and are promptly turned away.

Spock: What does it mean, “exact change”?

Kirk: They’re still using money. We need to find some.

Not only is money a foreign concept to the crew, it’s so foreign they didn’t even remember it was used in the Twentieth Century.

From Why Star Trek’s Future Without Money Is Bogus — Brain Knows Better

It’s tempting to imagine a post-scarcity future where money (as a system for allocating scarce resources) has vanished and the vast communist galactic super state takes care of everyone’s needs. But like the writer here, I don’t buy it. Some things will always remain scarce and desirable, like your attention span, and money will remain necessary. But it won’t be the same money that we have today. And if you want to see how it might be different, then come and join me tomorrow in listening to some perspectives that go far beyond technology to deliver important ideas about the future of money.

CBDC is a black and white issue

I was reading J.P. Koning’s excellent paper [PDF] on Central Bank Digital Currency (CDBC) for Brazil and came across his reference in passing to Narayana Kocherlakota, former CEO of the Federal Reserve Bank of Minneapolis, who wrote (in 2016) that economists do not know very much about the topic of anonymity and “calls for the profession to model it more systematically”. I think this is a really critical point, because the decision about where to set the anonymity dial for a cash replacement product is an important one, and not one that should be left to technologists.

This decision is discussed in the context of implementing a digital fiat currency of one form or another. The paper explores three ways to implement a CBDC for Brazil.

  1. MoedaElectronico (Electronic Cash): this is the most cash-like of the three CBDCs. It pays neither positive interest nor docks negative interest and is anonymous. Like cash, it is a bearer token.

  2. ContaBCB (BCBAccounts): this is the most account-based of the three templates. Ac- counts are non-anonymous and pay interest, like a normal bank account.

  3. MoedaHíbrida (Hybridcoins): provides a mix of cash and account-like features, including the ability to pay a varying positive and negative interest rate, while offering users the choice between anonymity or not. 

Now, the first two are well-known and well-understood. I wrote about them again last month (I’ve discussed “BritCoin” and “BritPESA” several times before), in a comment on Christine Lagarde’s speech [15Mb: Central banks, tokens and privacy] and I don’t propose to look at them further here. It’s that last example that interests me.

Let’s go back to that point about anonymity. In the paper J.P. says that the case can also be made for a permanently negative interest rate on anonymous CBDC. Why? Well, since we all understand that criminality and tax evasion impose costs on society, it may be worthwhile to design anonymous payments systems in a way that recoups some of the costs these activities impose.

In other words, construct a cash replacement in which anonymous transactions cost more than non-anonymous transactions. One way to do this, which is referenced by J.P. in his paper, was the “Crime Pays System” or CPS as conceived by the artist Austin Houldsworth. Austin is most well-known for designing the cover of my book “Before Babylon, Beyond Bitcoin” of course, but he also ran the Future of Money Design Award for Consult Hyperion’s annual Tomorrow’s Transactions Forum for many years. Oh, and he was awarded a Ph.D by the Royal College of Art (RCA). It was his idea to have me present CPS at the British Computer Society (BCS). We had my alter ego set out the new payment system to an unsuspecting audience who, I have to say, were excellent sports about the whole thing! It turned out to be an entertaining and enlightening experience (you can read more and see the video here).

Cps bcs

In CPS, digital payments would be either “light” or “dark”. The default transaction type would be light and free to the end users. All transaction histories would be uploaded to a public space (we were, of course, thinking about the Bitcoin blockchain here) which would allow anybody anywhere to view the transaction details. The alternative transaction type would be dark. With this option advanced cryptographic techniques would make the payment completely invisible with a small levy in the region of 10% to 20% would be paid per transaction.

The system would therefore offer privacy for your finances at a reasonable price. The revenue generated from the use of this system would be taken by the government to substitute for the loss of taxes in the dark economy.

What a cool idea.

Now, at the time it was just a concept. We didn’t spend much time thinking about how it would actually work (I was basing the pretend implementation for the BCS presentation on Chaumian blinding a la Digicash, hence this gratuitous picture of me influencing David in Vegas.)

David Chaum las vegas 2018

That was then. In the meantime, however, along came ZCash and the mechanism of shielded and unshielded transactions that J.P. has used as the basis for MoedaHíbrida’s two different modes. If the user decides to hold shielded (ie, dark) MoedaHíbrida tokens, then all transactions made with those tokens are completely anonymous and untrackable. The user can decide to unshield his or her MoedaHíbrida tokens so that all transactions can be seen (ie, light).

Offering users the choice of anonymity but making them pay for is a radical solution but I’m with J.P. in thinking that it deserves attention. What I think is very clever about using negative interest rates (which had never occurred to me) is that it allows for anonymous transactions without imposing a transaction friction, thus providing the cash substitute in the marketplace, but it penalises the stashing of anonymous cash. The negative interest rate means that dark tokens will be subject to a negative interest rate of, say -5% per annum, while light tokens will receive a competitive SELIC-linked interest rate.

Whether or not this is the way forward I or not, it is a line of thought that deserves serious examination in the context of CBDC design. If it is considered important to society to provide anonymous means of exchange, then the “tax” on the anonymous store of value seems a reasonable way to distribute the costs and benefits for society as whole.

The token Saga

As I explained to the Financial Services Club in London recently, I have a theory that while Bitcoin isn’t the future of money, tokens might well be. In case you are interested, here’s the deck I presented to them: it’s in three parts, first of all a high-level explanation of what tokens are, then a discussion about using tokens to implement money and finally a model to help facilitate discussion around these topics.

 

Of course, I’m not the only one who thinks that the financial services mainstream should be developing their token strategies. At Money2020 Asia in Singapore I had the privilege of interviewing Jonathan Larsen, Corporate Venture Capital Manager at Ping An and CEO of their Global Voyager Fund (which has a $billion or so under management). Jonathan has already forgotten more than I will ever know about financial markets and as he is also Chief Innovation Officer at Ping An (and a very nice guy too), I take his views very seriously. When I put to him that the tokenisation of assets will be a revolution, he said that “tokenisation is a really massive trend… a much bigger story than cryptocurrencies, initial coin offerings (ICOs), and even blockchain”.

Dave Birch and Jonathan Larsen

 

Photo courtesy of Fintechcowboys.cz

He went on to say that he had no doubt about the potential for tokenisation to “reduce friction across every asset class and to create fractionalization of assets where it does not exist today”. In fact, and I paraphrase only slightly here, he said that when the token market is properly regulated and the technology is stable then everything will be tokenised.

Wow.

Why do people like Jonathan (as opposed to techno-deterministic utopians such as myself) think that tokens are such a big deal? I think it’s because tokens are the first viable implementation of the 1990s dream of digital bearer instruments with the “code is law” (sort of) management infrastructure. They allow for the exchange of assets in an auto-DvP (delivery versus payment) mode with no clearing or settlement which means for efficient, liquid markets.

Now, one of the first steps towards a regulated token market has come the Swiss regulators (who are important because of the Zug “crypto valley” that has become the home of many token plays). The regulator there, FINMA, has developed an approach based on the underlying purpose of the tokens that are created. FINMA categorises tokens into three types: Payment tokens (ie, money), Utility tokens (tokens which are intended to provide digital access to an application or service) and Asset tokens (which represent assets such as stakes in companies or an entitlement to dividends). Of course, hybrid forms are possible and in practice there are likely to be a few different configurations. One good way to think about this, I think, is to think in terms of combinations of these token types as a means to implement the “digital bearer instrument” (DBI) that has long been seen as the basis of the post-internet, post-crypto financial marketplace.

DBI Schema

 

 

This is a realistic vision of the future. DBIs as a synthetic instrument comprising regulated tokens, DBI trading that operates without clearing and settlement on shared ledgers and shared ledgers with ambient accountability to create marketplaces that are not only more efficient but better for society as a whole. I touched on this in my talk at the FS Club but then went on to focus on the specific implications for digital money, as it is interesting to speculate what digital money created this way might look like.

We might, for example, imagine that for tokens to be used as money in the mass market they should be much less volatile than cryptocurrencies have been to date. Hence the notion of “stablecoins” that are linked to something off-ledger. An example of this category is the “Saga” coin (SGA). SGA has some pretty heavyweight backers, including Jacob Frenkel, chairman of JPMorgan Chase International, Nobel prize winner Myron Scholes and Emin Gün Sirer, co-director at the Initiative for Cryptocurrencies and Smart Contracts at Cornell University, so it deserves a look. This is a non-anonymous payment token that is backed by a variable fractional reserve anchored in the IMF’s special drawing right (SDR) basket of currencies which, as the FT pointed out, is heavily weighted in US dollars. These reserves will be deposited with regulated banks through algorithms in the underlying smart contract system.

It seems to me that initiatives such as Saga are more representative of the future of money than cryptocurrencies such as Bitcoin, but even they represent only part of the spectrum of possibilities that will extend across many forms of tokens. As I wrote last year, in “Bitcoin isn’t the future of money, but tokens might well be”, tokens won’t only be issued by companies, of course. It seems to me that tokens that implement the values of communities (and, because they are “smart”, can enforce them) may come to dominate the transactional space (think of the Islamic e-Dinar and the London Groat).