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].

No consensus on CBDCs

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

Screenshot 2020 05 18 12 21 20

Consensus Distributed 2020

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

Summers too much privacy

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

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

Mersch tokens

Yves Mersch talked about using tokens to implement CBDC.

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

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

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

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

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

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

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

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

Problems are opportunities

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

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

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

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

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

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

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

The great Chinese money experiment is over

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

China and paper money

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

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

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

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

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

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

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

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

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

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”.

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 Click To Tweet

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.

4th July!

July 4th! Such an important anniversary! I look forward to it every year, and every year I spend the 4th reflecting on revolution and the course of history. I’m sure you know why, but if you don’t, well, here is a hint. It’s the front page of the Swindon Evening Advertiser from July 4th 1995, the day I finally made the front page of my home town newspaper.

(Got to see my picture on the cover, got to buy five copies for my mother…)


Mondex Launch 

Yes, I was there on 3rd July 1995 in Swindon town centre when the Swindon Evening Advertiser vendor Mr. Don Stanley (then 72) made the first ever live Mondex electronic cash sale.  It was a very exciting day because by the time this launch came, my colleagues at Consult Hyperion had been working on the project for several years! For those of you who don’t remember what all of the fuss was about: Mondex was an electronic purse, a pre-paid payment instrument based on a tamper-resistant chip. This chip could be integrated into all sorts of things, one of them being a smart card for consumers.

Somewhat ahead of its time, Mondex was a peer-to-peer proposition, which we’ll come back to later on. This meant that the value was transferred directly from one chip to another with no intermediary and therefore no cost. In other words, people could pay each other without going through a third party and without paying a charge.

Unlike Bitcoin, transactions were actually instant and were actually free. Click To Tweet

It was true cash replacementinvented at National Westminster Bank (NatWest) in 1990 by Tim Jones and Graham Higgins. Swindon had been chosen for the launch because, essentially, it was the most average place in Britain. Since I’d grown up there, I was rather excited about this, and while my colleagues carried out important work for Mondex (e.g., risk analysis, specification for secure transfer, multi-application OS design and such like) I watched as the fever grew out in the West Country.


Mondex Billboard 

Many of the retailers were quite enthusiastic because there was no transaction charge and for some of them the costs of cash handling and management were high. I can remember talking to a hairdresser who was keen to go cashless because it was dirty and she had to keep washing her hands, a baker who was worried about staff “shrinkage” and so on. The retailers were OK about it. For example here’s a quote from news-stand manager Richard Jackson: “From a retailer’s point of view it’s very good but less than one per cent of my actual customers use it. Lots of people get confused about what it actually is, they think it’s a Switch card or a credit card”. That’s if they thought about it all.

It just never worked for consumers. It was a pain to get hold of, for one thing. I can remember the first time I walked into a bank to get a Mondex card. I wandered in with 50 quid and had expected to wander out with a card with 50 quid loaded onto it but it didn’t work like that. I had to set up an account and fill out some forms and then wait for the card to be posted to me. Most normal people couldn’t be bothered to do any of this so ultimately only around 14,000 cards were issued.

I pulled a few strings to get my mum and dad one of the special Mondex telephones so that they could load their card from home instead of having to go to an ATM like everyone else. British Telecom had made some special fixed line handsets with a smart card slot inside and you could ring the bank to upload or download money onto your card. I love these and thought they were the future! My parents loved it, but that was nothing to do with Mondex: it was because, in those pre-smartphone days, it was a way of seeing your bank account balance without having to go to the bank or an ATM or phone the branch. You could put the Mondex into the phone and press a button and hey presto your account balance would be displayed on the phone. This was amazing a quarter of a century ago.

For the poor sods who didn’t have one of those phones (everyone, essentially) the way that you loaded your card was to go to an ATM. Now, the banks involved in the project had chosen an especially crazy way to implement the ATM interface. Remember, you had to have a bank account in order to have one of these cards and so that meant that you also had an ATM card. So if you wanted to load money onto your Mondex card, you had to go to the ATM with your ATM card and put your ATM card in and enter your pin and then select “Mondex value” or whatever the menu said and then you had to put in your Mondex card. But if you go to an ATM with your ATM card then you might as well get cash, which is what they did.

It is possible that I’m not remembering this absolutely accurately, but I do remember these were two places where the hassle of getting the electronic value outweighed the hassle of fiddling about with coins: the bus and the car park. My dad really liked using the card in the town centre car park instead of having to fiddle about looking for change but it often didn’t work and he would call me to complain (and then I would call Tim Jones to complain!). I remember talking to Tim about this some years later and he made a very good point which was that in retrospect it would have been better to go for what he called “branded ubiquity” rather than go for geographic coverage. In other words it would have been better to have made sure that all of the car parks took Mondex or make sure that all of the buses took it or whatever.

So why I am wallowing in this nostalgia again? Why should more people be celebrating the Mondex Silver Jubilee? Well, look East, where the first reports have appeared concerning the Digital Currency/Electronic Payment (DC/EP) system being tested in four cities: Shenzen, Chengdu, Suzhou and Xiong’an. DC/EP is the Chinese Central Bank Digital Currency (CBDC).

DCEP phone

with the kind permission of Matthew Graham @mattysino

The implementation follows the trajectory that I talk about in my book The Currency Cold War, with the digital currency being delivered to customers via commercial banks. The Deputy Governor of the People’s Bank of China, Fan Yifei, recently gave an interview to Central Banking magazine in which he expanded on the “two tier” approach to central bank digital currency (CBDC). His main points were that this approach, in which the central bank controls the digital currency but it is the commercial banks that distribute it, is that is allow “more effective exploitation of existing business resources, human resources and technologies” and that “a two-tier model could also boost the public’s acceptance of a CBDC”.

He went on to say that the circulation of the digital Yuan should be “based on ‘loosely coupled account links’ so that transactional reliance on accounts could be significantly reduced”. What he means by this is that the currency can be transferred wallet-to-wallet without going through bank accounts. Why? Well, so that the electronic cash “could attain a similar function of currency to cash… The public could use it directly for various purchases, and it would prove conducive to the yuan’s circulation”. How will this work? Well, you could have the central bank provide commercial banks with some sort of cryptographic doodah that would allow them swap electronic money for digital currency under the control of the central bank. Wait a moment, that reminds me of something because… yep, that’s how Mondex worked. There was one big difference between Mondex and other electronic money schemes of the time, which was that Mondex would allow offline transfers, chip to chip, without bank (or central bank) intermediation.

Mondex Paraphanalia

Offline person to person transfers. That’s huge. Libra can’t do it, and never will be able to. To understand why, note that there are basically two ways to transfer value between devices and keep the system secure against double-spending. You can do it in hardware (ie, Mondex or the Bank of Canada’s Mintchip) or you can do it in software. If you do it in software you either need a central databse (eg DigiCash) or a decentralised alternative (eg, blockchain). But if you use either of these, you need to be online. But with hardware security, you can go offline.

After all these years, the People’s Bank of China have decided to go down the Mondex route, so now seems a good time go to think back to those long ago days and see what lessons might be passed on to a new generation of electronic cash entrepreneurs. I’ll focus on three here.

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

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

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

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

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

Don’t listen to technologists (eg, me) listen to the anthropologists

I thoroughly enjoyed the FS Club discussion with eminent futurologists looking back on their predictions from the year 2000 (and learning from them where they were wrong) and looking forward t0 2040. I especially enjoyed it because one of the speakers was Gill Ringland. Gill is now a Director of Ethical Reading, set up to energise an ethical business climate in the Thames Valley, but in the past was head of strategy at ICL amongst other things. I had the good fortune to meet her way back, at the 2012 Digital Money Forum.  I’d been very impressed by a report that she’d written and asked her to come along and give a presentation about it. She gave a super talk about her exploration of the world of financial services in 2050 from the report “In Safe Hands” (published at Long Finance).

IMFS Scenarios

I wrote at the time that she had used a tried and tested scenario planning technique (the same one that I always use these days) to generate a 2×2 matrix of four scenarios imagined using the “Washington consensus” vs. “Community-based values” on one axis and “mundane” and “virtual” (essentially) on the other axis to reflect the extent to which real or virtual communities come to shape the economy and therefore financial services. Gill explained at the time that in order to create scenarios (i.e., internally-consistent views of possible futures) for a generation from now, she found it useful to look two generations back, and consider the asset classes managed by the financial services industry in 1930. These were broadly commodities, cash, equities and brains. Looking forward, she added a fifth asset class based on demographics for 2050.

Transactions, therefore, become the exchange of these asset classes (but in digital form, of course). This seems to me especially interesting in a city-centric context because, for example, a permit to reside in a desirable city could well become a key tradable commodity. Indeed, this view was reinforced in the FS Club discussion, where the even more expensive view that cities might begin to dictate the policies and trajectories of the nation state was put forward. In this context, Gill’s prescient narrative of the “C50” (the organisation of the 50 richest city-states that will replace the G20 as the mechanism for “managing” the world economy) which came from her “Many Hands” scenario, forms a solid narrative around the future economic organisation of a successful, functional world. As Martin Wolf wrote in the FT around that time “this is the age of cities, not of national economies” (going to say that “it is high time London became a true city state).

(This surely implies that the “cash” of cities will become the most important kind to the average person. In other words, having abandoned Sterling for London Lolly and US Dollars for New York Notes and LA Loonies, will these be sufficient to provide the medium of exchange for the future economy. Right now, almost all transactions are local and even at the national level only 1%-2% of European transactions are cross border. If I live in London and use London Lolly for the train, for lunch and at the supermarket, is it such a big deal to convert it to Moscow Moolah to buy something online? Especially when your phone does it for you?)

A world economy built up from cities and their hinterlands will obviously demand different financial services and institutions from one based on national economies. This was foreseen by the wonderful Jane Jacobs’ work “Cities and the Wealth of Nations” that was published way back in 1984. My Jacobs-influenced city-centric perspective was reinforced when I happened to read a Canvas8 report “The city an an identity anchor” (which echoed Gill’s points about identity, which I’ll return to in a minute) and then the World Economic Forum (WEF) 2017 report “Cities, not nation states, will determine our future survival”.

What this means to me is that the future sense of identity will be city-centric, with people seeing themselves as Londoners and New Yorkers rather than Brits and Yanks, a view that the COVD-19 crisis seems to have reinforced. Their loyalties will be more local than ours and the relationships between cities will replace the relationships between countries as the most important tensions and dynamics. I can’t help but wonder if cities will begin by forming trade pacts and then moving on to form defence alliances, bearing in mind that the wars of the future will be fought in cyberspace. Never mind national identity in the India (Aadhar) model or provincial identities as in Canada. What if these specific city identities are the core of the future digital identity models?

Passports in Pimlico

This leads me to wonder yet again what the model of city-centric identity might be. How will those identities relate to trade, commerce and society as a whole? Which attributes will be the valuable ones (beyond is_a_person, of course) and which will atrophy to form vestigial credentials of no practical value? When discussing the C50 scenarios back in 2012, Gill made a passing but powerful observation on future transactions and it has stayed central to my thinking on the topic. She said that individuals will protect their “personal identity, credit ratings and parking spaces” at all costs and I think this is a powerful and imaginative narrative to group ideas about attributes and credentials.

Personal identity. I might take issue with Gill here and say “personal identities” but I know what she means. An infrastructure that delivers both security and privacy to identity transactions of call kinds will be needed to support the reputation economy of the networked society. There is no possibility of social media and social democracy co-existing in this future scenario without such an infrastructure.

Credit rating. The commercial reputation that means that you can buy or sell, whether an individual or an organisation will be central to economic existence. In a networked society, this is more likely to be something that comes from the social graph than the conventional credit rating of today.

Parking spaces. This means the (tradeable) right to reside in a particular place. These rights will certainly be of critical importance to the individual, since their own identity will be closely related to the city (and hinterland) of residence. There’s no reason why (for example) London and Scotland should have the same immigration rules. If that sounds a little far-fetched, I can tell you that it is happening right now. I came across an interesting case study from Denmark via the social anthropologist Camilla Ida Ravnbol from the University of Copenhagen. Since the COVID-19 crisis has restricted travel, any “permission to work in Copenhagen” document has become a valuable traded commodity in the marginalised Roma community that needs access to the city to earn money (by collecting materials for recycling, for example).

In the language of digital identity, digital money and digital diligence, then, this line of thinking imagines a reputation economy anchored in the mundane which is (as I explored in my book “Before Babylon, Beyond Bitcoin“) a landscape animated by new technology but shaped by physical as well as virtual communities. What does this all mean for transactions? What does it mean for the future of the financial system? Or, more specifically, to answer the question asked at the very beginning, what does it mean for the world in 2040?

Well, I don’t know. But if I wanted to find out, I’d start by talking to social anthropologists. Fortunately, Camilla I will be chairing a session that touches on these issues along with Atreyee Sen at the European Association of Social Anthropologists conference in July. As the conference is now online, you can sign up and log in online to join us here. We are Panel 57, “Digital encounters, cashless cultures: Ethnographic perspectives on the impact of digital finance on economic communities”, so please do pop in and take part in the discussion.

 

China moves forward with CBDC

The first reports have appeared concerning the Digital Currency/Electronic Payment (DC/EP) system being tested in four cities: Shenzen, Chengdu, Suzhou and Xiong’an (the recently-established “development hub” near Beijing and it is where the “non-core” functions of the Chinese state are going to be relocated to). DC/EP is the Chinese implementation of a Central Bank Digital Currency (CBDC) and in my opinion at least it is a really interesting – landmark, in fact – development in the history of money.

DCEP phone

with the kind permission of Matthew Graham @mattysino

The implementation follows the trajectory that I talk about in my book The Currency Cold War, with the digital currency being delivered to customers via commercial banks. The Deputy Governor of the People’s Bank of China, Fan Yifei, recently gave an interview to Central Banking magazine in which he expanded on the “two tier” approach to central bank digital currency (CBDC). His main points were that this approach, in which the central bank controls the digital currency but it is the commercial banks that distribute it, is that is allow “more effective exploitation of existing business resources, human resources and technologies” and that “a two-tier model could also boost the public’s acceptance of a CBDC”. 

He went on to say that the circulation of the digital Yuan should be “based on ‘loosely coupled account links’ so that transactional reliance on accounts could be significantly reduced”. What he means by this is that the currency can be transferred wallet-to-wallet without going through bank accounts. Why? Well, so that the electronic cash “could attain a similar function of currency to cash… The public could use it directly for various purchases, and it would prove conducive to the yuan’s circulation”.

Hence what I thought most noticeable about the first implementations (this is from the Agricultural Bank of China, ABC) is that they do indeed in include this person-to-person offline transfer functionality. You can see the “touch it” button on the screen below.

(As I note in the book, this makes DC/EP look more like Mondex than Libra, so I was surprised to see the digital Yuan labelled “crypto-inspired” on Twitter!)

DCEP interface

with the kind permission of Matthew Graham @mattysino

Anyway, my main point is that I agree with what is said here in this Fortune magazine article ”China is poised to beat the U.S. in the digital currency race” which that the shift to what I call “smart money” will reward first-mover economies. As this article notes, China will quickly integrate its digital currency into hundreds of “blockchain” projects in which autonomous digital sensors and devices directly exchange information and money. Removing intermediaries from these device-to-device transactions will allow China to automate entire Internet of Things (IoT) ecosystems, bringing efficiency gains to smart cities, supply chains, and electricity grids.

(This is, incidentally, why things will need digital identities just as people do.)

More importantly on the global stage, the Forbes article notes that China could offer digital currency machine-to-machine payments all the way along its the Belt and Road Initiative (BRI). Indeed it could. And will. The noted venture capitalist Fred Wilson supports this view, writing that the shift to digital currencies will be led by China “who moves first and benefits the most from this move”. He goes on to say that America will “hamstrung by regulatory restraints and will be slow to move” resulting ultimately in decentralised finance exchanges in Asia becoming the dominant capital markets. Whichever way you look at, digital currency is a big deal.

The dollar, de Bono and digital currency

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

CSFI TV

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

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

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

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

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

CSFI DCR

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Real Innovation

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

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

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