Monet laundering and a new kind of market

You’ve probably read something about the latest crypto-craze. My good friend Lawrence Wintermeyer wrote a great piece about it here, describing how an anonymous guild of “art digitalists” bought an original Bansky and then set fire to it after digitizing the piece into a non-fungible token (NFT) they sold for $400,000.

NFTs really hit the headlines when the artist Mike Winkelmann (“Beeple”) sold an NFT of a JPEG he had created for $69m at Christies. It’s a lot to pay for nothing since, as my good friend David Gerard eloquently notes, Christie’s 33 page conditions of sale make it clear that the buyer did not obtain copyright or indeed any other rights to the file. The $69m is for nothing more than an albeit uncloneable receipt for the artwork. Not that the buyer minded, because he runs a crypto fund that invests in NFTs and issues tokens that are shares in the portfolio. Beeple owned 2% of these tokens, which went up in value from $0.36 per token to $23 after the Christie’s sale. Nice.

Now, you may think (as I did) that this is more interesting as a piece of performance art about the manipulation of cryptomarkets than a window into a new world that decentralises auction houses out of existence, but it is undeniably interesting. That’s because, trivially-copyable artworks to one side, NFTs could deliver radically more efficient markets.


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

To see why, let’s first remind ourselves of what tokens are. Tokens are a cryptographically-secured digital asset (that is, they cannot be counterfeited or duplicated). As I explained in my book Before Babylon, Beyond Bitcoin a few years ago, although tokens are not specific to Ethereum they took off with the development of the ERC-20 standard back in 2015. ERC-20 defined a way to create a standard form of token using consensus applications on the Ethereum blockchain. Such tokens are a simply structured data exchanged between these applications, a practical implementation of digital bearer claims on assets with no clearing or settlement involved in their exchange (and hence a more efficient marketplace for their trading), thus creating a means to make the transfer of fungible value secure without a central authority.

I have written before that fungibility is a critical defining characteristic of money and one of the reasons why Bitcoin isn’t. Click To Tweet

All of the dollars in the world are the same, and any dollar can substitute for any other dollar. But all of the Bitcoins in the world are not the same. Similarly, my excellent stalls ticket to see the mighty Hawkwind play at the London Palladium is unique. So… how do you know that that ticket belongs to me? Right now there are event promoters, and ticketing agencies and credit card acquirers and databases and barcodes to try to figure that out. However, if I am a bad boy and sell a ticket that is nothing more than an e-mailed barcode to two other people and they both show up to watch a band, neither the venue nor the band nor other fans nor anyone else can tell which barcode is authentic and which is a copy.  But what if the ticket isn’t a barcode, but a non-fungible digital asset stored in my digital wallet? An NFT?

Now, non-fungible digital assets are fun and markets for them existed before Bitcoin, the blockchain and Enterprise Shared Ledgers (ESLs). Consider the obvious example of people playing massively-multiplayer games (MMGs) such as World of Warcraft and the like. People buy sell digital assets all the time (one of the first blog posts that I ever wrote was about the mining of digital gold in these games, and that was back in 2006!). If I want a magic sword or a laser cannon or a nicer hat for my avatar, I can buy it with real money. If you could copy magic swords to infinity, then they would have no value. So the number of magic swords is limited, and thus a market arises. So who says who the magic sword belongs to? If I pay you some real dollars for a non-existent virtual sword, who transfers title? Well, in the case of the games, it is obvious: it’s Blizzard or CCP Games or whoever else is in the middle, running the game.

New technology means that I can sell you the magic sword without having anyone in the middle. On Ethereum, for example, there are now a number of different ERC token standards, most notably ERC-721 that defines non-fungible digital assets. ERC-721 hit the headlines (well, for people like me anyway) back in 2017 when CryptoKitties took off. This is game on Ethereum that allows players to purchase, collect, breed and sell virtual cats and it became so popular that caused such congestion on the Ethereum network that is slowed in down significantly. The point is though that we can now exchange unique digital assets in a fully decentralised manner.

I remain unconvinced that buying digital receipts for trivially-cloneable artworks is a sound long-term investment strategy, although I am given to understand that much of the art market is more about money-laundering than Monet (Monet laundering! Why didn’t I think of this headline before!). However, that is not to say that there is no future for NFTs. On the contrary, some of these art market experiments are breaking ground for a new way of working that I think will indeed transform some markets.

Real Connections

These digital assets will very often be a means to control of things in the real world without having anyone in the middle either. Some years ago I asked if shared ledgers and such like might be a way to tackle the issue of “ID for the Internet of Things” (#IDIoT). I said at the time that I had a suspicion that there might be something there. My reason for thinking that was that there is a relationship between digital assets and things, because blockchains and tokens deliver a virtual representations of things in the mundane that, as with their physical counterparts, cannot be duplicated. If we can link the digital asset of a Rolex watch to a physical Rolex watch, we can do some very interesting things.

(As it happens, I am the non-executive Chairman of Digiseq, a UK startup that does this using tamper-resistant microchips).

What all of this means is that we can use the new technologies of cryptoasset trading (the world of decentralised finance, or “defi”) to develop efficient markets in scarce resources, markets that will hinge on the ability to maintain and prove the provenance of real-world objects, whether these are magic swords or designer handbags.

The opportunities for new and disruptive businesses here are real and substantial. Here’s an example, continuing the music theme. A band is going to play a concert. There are 10,000 seats in the venue and 100,000 members of their fan club. So the band randomly distribute the tickets to the members of the fan club who pay $50 each for them (this is all managed through smart contracts). And that’s it. Now, the members of the fan club can decide whether to go to the concert, whether to buy some more tickets for friends, whether to give their ticket to charity or whatever. They can put their tickets onto eBay and the market will clear itself. The tickets cannot be counterfeited or copied for the same reason that a Bitcoin cannot be counterfeited or copies: each of these cryptographic assets belongs to only one cryptographic key (“wallet”) at one time, and whoever has control of that key has control of the ticket.

Not your keys, not your Kings of Leon, as the kids might say.

(An edited version of this piece was first posted on Forbes, 7th March 2021.)

Tokens, tokens everywhere

You don’t have to be a cryptocurrency believer to think that the underlying technology of cryptocurrencies (value transfer without an intermediary, with double-spending prevented through distributed consensus) is going to change the financial sector. Indeed, the use of that underlying technology may well mean that cryptocurrencies in their current form are never needed, because more general digital asset transfer platforms will supplant them. These platforms, which enable the exchange of digital assets without clearing or settlement (let’s call these digital assets “tokens” for short), have real potential.

I wrote in my book “Before Babylon, Beyond Blockchain” back in 2017 that tokens may make a real difference to the way the economy works and the subsequent evolution of the cryptocurrency world has reinforced my view. Not that my opinion counts for much. But the opinion of Jay Clayton, the chairman of the U.S. Securities and Exchange Commission (SEC), counts for a lot more and he is saying the same thing: in time, everything will be tokenised.

When the current craziness is past and digital asset tokens have become a well-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’s a view that is supported not only by wide-eyed techno-utopian hype-merchants (eg, me) but by the sensible, forward-looking and rational financial sector leaders. I remember interviewing Jonathan Larsen (chief innovation officer of Ping An Group and head of the Ping An Global Voyager Fund) on stage at Money20/20 Asia. He told me that “Tokenization is a really massive trend… a much bigger story that cryptocurrencies, initial coin offerings (ICOs), and even blockchain” and confirmed my suspicion that long-term planning in the financial services sector must include some radically different scenarios. Jonathan spoke eloquently about the characteristics of the new asset class (including fractionalisation, which fascinates me) but went on to talk about the key characteristics of a digital asset platform that can fundamentally change the way the world of finance works: “transparency and universal access and the ability to reduce frictional costs”. I see this as a way to more efficient and liquid markets, and I am hardly alone in this.

Digital assets that are bound to “real world” value by regulated institution present not only the mechanism for a different financial sector but an innovative approach to a better financial sector. A sector that serves wider society more effectively and attacks the stubbornly high cost of financial intermediation in a modern economy. In a speech, Banque de France first deputy governor Denis Beau touched on inefficiencies in the sector and said that tokenisation could be a way to “answer the market’s demands”. I agree, obviously.

At the World Economic Forum this year, there was a discussion about what assets might be tokenised, with examples ranging from property to owning a fraction of a piece of art by Andy Warhol, although the ones that attracted the most discussion were enabling farmers in emerging markets to raise finance by selling future crop yields and sports stars selling the rights to their future income. I can foresee a rich and varied marketplace. Some tokens will be assets, and fractional ownership of assets. Some tokens will be claims on future products and services. Some tokens will be the currencies of communities.Who knows which of these might become a real markets, but one candidate for a successful token class (for which there appears to be real demand) is central bank digital currency (CBDC).


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

Don’t Listen to Me

Now, when people like me or the head of Ping An VC fund or a deputy governor of the French central bank talk about the inevitability of tokenisation, that’s one thing. But when Jay Clayton said at the beginning of October that while there were once stock certificates, today there are database entries representing stocks and “it may be very well the case that those all become tokenized” (my italics), I think it’s time to begin some serious planning for a reformed financial sector that is more efficient, more effective in serving the wider economy and more resistant to bad behaviour of all kinds.

That last point is important. Jonathan’s mention of transparency highlights one of the key reasons that we should all want to see this kind of financial sector. Look at some of the recent problems in the world of finance, such as the collapse of Wirecard. Corporate accounts included assets that simply did not exist. Since auditors and the regulators and the board were unable to prevent criminality on a grand scale here, it is reasonable to ask whether technology might be able to do better job. Well, I think the answer is yes, and I think tokenisation is part of consistent vision of just how it might do so: if I claim to own one-thousandth of the Mona Lisa it is easy for you to check on the digital asset platform to see that the token representing one-thousandth of the Mona Lisa is in my wallet.

Thus, while the tokenisation of financial assets and the creation of what I heard Jeremy Allaire of Circle call the “long tail” of capital markets is a much broader topic than CBDC its apparent inevitability means we should begin to explore this concept of CBDC as simply one kind of a more generalised digital asset, albeit one that is bound to risk-free central bank money. Even that most conservative of organisations, the Association of German Banks, says that in order to “maintain Europe’s competitiveness, satisfy customers’ needs and reduce transaction costs, the introduction of euro-based, programmable digital money should be considered”.

What they refer to a programmable digital money, and what I call smart money, is money built on tokens. In this model of the world, one might imagine using a platform built from cryptocurrency technologies to trade thousands or millions of different tokens, with one form of these tokens being digital currency and one category of token issuers being central banks. This is no crazy cryptomaximalist conjecture but a reasoned and reasonable projection of capitalism’s use of the new technology of value transfer.

Huw van Steenis of UBS, who I take very seriously on these matters because of his work at the Bank of England, says that there will be a “three-horse race” around the future of money with private tokens and CBDCs developing in parallel with efforts to improve the current system (see, for example, SWIFT gpi and the UK’s new payments architecture). This is wise counsel, and there is indeed every possibility of competition between these approaches stimulating innovation in the short-term but then a longer-term convergence as the platforms for exchanging digital asset tokens are used to implement both private tokens and public tokens (including CBDCs).

In this appealing vision of the future, there will be nothing technological to distinguish central bank digital currency from other digital assets that will be functionally equivalent to money, such as corporate currencies. Dollar bills from Bill’s dollars (I never get tired of this trope): one will be tokens backed by risk-free central bank money, the other tokens backed by Microsoft revenues. But they will both be tokens, exchanged without clearing or settlement through the same secure global digital asset platform.

[This is an edited version of a piece that first appeared on, 2nd November 2020.]