Clouds, Chips Or Chains? the Three Ways to Implement a Digital Dollar: Fedpesa, Feddex Or Fedcoin Received: 23Rd October, 2020 David G.W

Journal of Payments Strategy & Systems Volume 14 Number 4

Clouds, chips or chains? The three ways to implement a digital dollar: FedPesa, FedDex or FedCoin Received: 23rd October, 2020 David G.W. Birch Principal, 15Mb Ltd., UK

David G.W Birch is Principal at 15Mb Ltd, urgency to this, as the beta testing of a Chinese Global Ambassador for Consult Hyperion and digital currency is already underway. Technology Fellow at the Centre for the Study of Financial Innovation. He is an internationally- Keywords: digital currency, electronic recognised thought leader in digital identity cash, evolution, digital money and digital money, and was named one of the global top 15 sources of business information INTRODUCTION by Wired magazine. His most recent book, ‘The When people talk about a digital currency, Currency Cold War’, was published in May 2020. they generally mean something more inter- David G.W. Birch Dave graduated from the University of South- esting than just another form of electronic ampton with a BSc (Hons) in physics. money (e-money). After all, we already have e-money, and lots of it. In developed mar- Abstract kets almost all money is already e-money This paper explores the ‘evolutionary tree’ of elec- and only a small fraction is in the form of tronic cash using a series of case studies; presents a notes and coins. If there is a point to creating taxonomy to facilitate a discussion of the strategic digital currency, then it must be as a poten- options available for central bank digital curren- tial substitute for those notes and coins. This cies; and highlights the three practical alternatives would imply that digital currency, then, is for implementing such a currency: as balances not a form of e-money but a form of elec- maintained offline in tamper-resistant hardware tronic cash (e-cash). (‘FedDex’); as balances maintained online in a The crucial distinction between e-money database (‘FedPesa’); or as tokens managed by and e-cash is that if I want to pay you for an online shared ledger (‘FedCoin’). The paper something, I can send e-money to your bank concludes with the observation that a FedCoin account; people cannot use PingIt, Swish or solution may offer the most opportunities for inno- Venmo to put money into someone else’s vation and economic growth. The idea of some form pocket, only into an account somewhere. of FedCoin as a platform not just for smart money But e-cash is just like physical cash: if I send but very smart money is appealing in the central it to you, it becomes yours. You can put it bank context as a way to implement the popula- into a bank account if you want to, but that tion-scale electronic cash system required to deliver a is up to you. If you want to leave it in your 15Mb Ltd. national digital currency. This is important because smartphone, or your television or your car, 1 Armadale Road, Woking, the renewed focus of central banks on the potential then that is your choice. To simplify, then, Surrey GU21 3LB, for central bank digital currencies should highlight there is a difference between e-money that UK E-mail: [email protected] the potential for electronic cash as a platform for is stored in accounts and e-cash that is stored new opportunities and a new generation of finan- in wallets. Journal of Payments Strategy & Systems cial services, not simply a more efficient means to Visa and MasterCard, Amex and Dis- Vol. 14, No. 4 2020, pp. 339–352 © Henry Stewart Publications, implement domestic retail payments. There is some cover, Unionpay and others have delivered 1750-1806

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convenient e-money to everyone on Earth problems of how a value transfer system (well, everyone on Earth with a bank determines whether the payer is entitled to account plus some prepaid cards around the transfer value to a payee (authentication) and edge) and they have been astonishingly good whether the value that they are sending is at it. When I get off a plane in Sydney or real or fake (authenticity). 2 Samarkand, I expect to stroll into my hotel This evolutionary approach is explored and pay with my chip-and-PIN Amex card. in the present paper, leading to a discus- This is a frankly astonishing achievement. sion of the three most practical options However (to steal a phrase from Facebook for a CBDC. These are set out along with CEO Mark Zuckerberg), as it stands, nei- personal views on how the options can illu- ther consumers nor businesses can send minate current digital currency discussions. currency to their counterparties across the The paper concludes with a suggestion as to globe with the same ease as they might send how central banks in developed countries them a photo. For that to happen, we need might bind their technology choices to the the e-cash that is not yet available but which benefit of not only the financial sector but could be provided most obviously either as also the wider economy. a private claim against other currencies or as a public good in the form of a central bank THE E-CASH GENES digital currency (CBDC). The Bank of England assumes that any To understand how e-cash will be used to CBDC will be introduced alongside, rather create a digital currency that is likely to than as an immediate replacement for, both work, it is useful to step back and look at e-money and cash,1 but developing the nar- what one might call the evolutionary tree rative from there on is complicated by the — not in exhausting detail, but in order to fact that despite the paucity of useful taxon- see why one might come to some conclusion omies for CBDCs, there would appear to be about how a digital currency can be imple- no useful shared taxonomy of implementa- mented. To do this, one must first identify tion options. the fundamentals that are responsible for the One novel way to develop an imple- evolution of e-cash. These rest on the obser- mentation taxonomy is to consider what vation that creating a working means of the ‘genes’ of a digital currency might be exchange means solving two essential prob- and then look at how these have ‘mutated’ lems, as shown in Table 1. If you are going to transfer value to me, I need to know that over the years under the pressure of natu- the value is yours to give and I need to know ral selection from the payment marketplace. that the value is real. Each of these involves This gives a way of understanding an evo- solving different but related problems. lutionary tree of electronic cash that serves One can think of these two problems to illustrate the recent history of the sector, as the ‘genes’ and then look at evolution provides for some interesting speculation on of e-cash as the story of new technologies where it might develop further, and facil- coming along to mutate solutions to prob- itates useful conversation between digital lems under the pressures of natural selection currency stakeholders. in the payment marketplace. To explore and experiment with this approach, take two genes, which one might broadly label authentication and authentic- The authentication problem ity. This very structure is set out in ‘The The authentication problem comes down to Currency Cold War’, which notes that proving the ownership of a cryptographic these genes address the related but separate key. This is something we do whenever we

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Table 1: The digital currency problem

The identity issue The value issue What is the problem? The authentication problem: The authenticity problem: How do I know that it’s your How do I know that the money money? is real? What new technology can help? Devices, biometrics, artificial Clouds, chips, chains intelligence wave a smartphone over a reader to get on The bank app on my iPhone not only a bus, punch in a PIN after inserting a bank knows who I am and where I am, it also card in a shop terminal or type in a verifica- knows what I have been doing. Thus, the tion code (when buying something online). combination of the bank and the mobile Each of these works to different degrees of operator really ought to deliver something certainty. Access to a device, remembering special. For example, because of continuous a PIN, possession of a card, having a face, passive authentication — the software run- knowledge of the verification code — all of ning in the mobile phone that checks how these are examples of authentication ‘fac- I hold the phone, where I go, what I do, tors’. Generally speaking, people are happy how I type and so on — the use of PINs and with their counterparties demonstrating passwords is redundant: when the bank calls, one factor for small transactions, two factors there should be no question of asking for my for medium-sized transactions and three or mother’s maiden name or my PIN because more for larger transactions. the phone will already know whether or not This paper considers the authentication it is me. problem to be solved and will not dwell on There is no need to discuss authentication it further. While the authentication journey further, so the paper moves on to the other for consumers is not yet optimised (to say ‘gene’ for electronic cash: authenticity. the least), the appropriate technologies and standards are progressing, although many banks still rely on their own platforms for The authenticity problem the time being. This is unsatisfactory, as The authenticity problem is straightforward may be illustrated using the recent exam- in mundane transactions: if you give me a ple of when I called my bank to enquire physical banknote, I need to know that it about a new service — not to order any- is not counterfeit. In virtual transactions, thing, just to ask a question about business however, there is an additional factor: if bank accounts. Now, as is normal when one you give me a digital bank note, I not only calls a bank that one has been with for many need to know that it is not counterfeit but years, the bank first requested authentica- also that you have not given it to someone tion based on a selection of publicly available else already. Thus, authenticity is a rela- information (eg date of birth and mother’s tively easy problem to solve in the physical maiden name) before asking a series of ques- world (because I can see if you have put the tions, the answers to which they knew but banknote into my hand) but not in the digi- I had forgotten. This seems an odd way to tal world. This is why Mr Zuckerberg’s goal authenticate a customer who has the bank’s of making sending money as easy as send- app installed on their phone. ing photos is difficult. When you send your

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friend a photograph of you on holiday, you one is trying to implement software e-cash: are sending them a copy of the photograph no privacy, because the database operator and not the original. This is all very well for can always see exactly what is going on. photographs, but not so good for money. As the paper will discuss in due course, As has been understood from the very however, cryptography can deliver some earliest days of electronic money, the cru- counter-intuitive services and it was one cial problem in the world of electronic cash of the pioneers of e-cash who found a way is this double-spending problem. This is the to use cryptography to have a centralised architectural foundation of e-cash schemes database yet provide privacy to users. This and it must be solved at population scale was David Chaum’s DigiCash. because moving from a form of electronic money that is held in the accounts of financial institutions to a digital currency that DigiCash is a form of money that can be held, well, The cryptographer David Chaum launched anywhere, means moving from e-money to DigiCash b.v. in Amsterdam back in 1990 e-cash for everyone. with a contract from the Dutch govern- So how does one stop people from ment to build and test technology to support making up fraudulent e-cash or giving anonymous road-toll payments.3 Along with the same e-cash to more than one person? a number of other inventions in the field, Cryptography works very well with regard to Chaum came up with something called counterfeit prevention and detection because ‘blinding’. Blinding means that someone it is to all intents and purposes impossible issuing e-cash (eg a bank) can use cryptog- to forge a digital signature (exactly how raphy to know with absolute certainly that digital signatures work is beyond the scope some e-cash is real but find it cryptograph- of the present discussion, suffice to say that ically impossible to know who the e-cash they do). In the digital money world, this is was issued to. a simple problem to solve. Enter the internet. It was apparent that Double spending, however, is a tougher DigiCash’s eCash, as the product was then nut to crack. When it comes down to it, called, could work very well in this new there are only two ways of preventing dou- online environment and deliver an anony- ble spending: online, by having some sort mous equivalent of cash into the new space. of database to prevent unauthorised copying To guard against double-spending, eCash of value, or offline, by storing value in tam- maintained a database of used coins. So, if per-resistant hardware from where it cannot someone sent you some e-cash, you could be copied. check the database to make sure that they had not previously given it to someone else. The system never crossed the chasm. A E-CASH EVOLUTION few banks signed up to experiment with Together, the authentication and authentic- the new system, but it never gained any ity genes give shape to e-cash systems so it traction and DigiCash eventually filed for is worth exploring how these have mutated bankruptcy in 1998. It turned out that con- since the early experiments in the field. The sumers were not interested in anonymity first e-cash pioneers began by having a wal- and were wholly content to use their credit let on a PC with password authentication cards to buy things online. If you had to get and a central database, which these days an account at a bank to use eCash, then you would be off in the cloud somewhere. This might as well just use the debit card they approach has an obvious disadvantage if gave you.

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DigiCash was a valuable experiment — in, enter their PIN, select ‘Mondex value’ an attempt to use wallets and the web to (or whatever the menu said), and then insert create an alternative payments network built their Mondex card. Most people never both- around the individual. It contained many ered. Anyone who takes their ATM card to ideas that were influential in later devel- the ATM might as well get cash — and they opments in cryptography, but it was just as did. important in providing lessons about how to Mondex used its secure hardware to allow make a wholly new online form of money offline, card-to-card transfers — a radi- work. cal decision at the time. A variety of other Around the same time that DigiCash smart-card based schemes were introduced launched, NatWest in the UK decided to around the world at the time (eg Visacash) try a really radical experiment in digital but these were account-based and did not money by creating a scheme that allowed facilitate such peer-to-peer value transfer. true person-to-person value transfer — a Similarly, DigiCash was not the only data- genuine attempt to deliver e-cash into the base-based software e-cash experiment of mass market. the time. There were many experiments using different kinds of cryptography, such as DEC’s Millicent, QPass and eCharge,4 as Mondex well as experiments in using different forms Mondex was invented by Tim Jones and of value (eg e-gold, Beenz, Flooz and so on). Graham Higgins at the National Westmin- An early example was CyberCoin, manifest ster Bank (NatWest) in 1990. Instead of a in the UK as ‘Barclaycoin’. centralised database, it used smart cards to store electronic value. Although pilot schemes were launched around the world, Barclaycoin it never took off. While the technology In 1997, my Consult Hyperion colleagues worked, thanks to the work by Consult and I took part in an experiment with paid Hyperion among others, the banking pro- internet content.5 For this experiment, we cesses did not. I can remember the first time chose Barclays’ BarclayCoin scheme, which I walked into a bank to get a card: I wan- was based on the CyberCoin scheme devel- dered in with £50 and expected to wander oped by the US internet payments pioneers out with £50 loaded onto a card, but that CyberCash. This was a software-based was not how it worked. Customers had to scheme, which required consumers to fill out some forms to set up an account and download a free wallet to their computer. then wait for the card to be posted to them. This wallet was then charged up from a The hassle was too much for most people, credit card to hold digital money that could so ultimately only around 14,000 cards were be spent on the web. The wallet was down- issued. loaded free from Barclays. When the card eventually arrived, it had Once a customer had the wallet they to be taken to an automated teller machine could then go online and start buying. (ATM) in order to load it. The process of When they clicked on a link to the digital loading the card was especially crazy. As product they wanted to buy, they were sent customers had to have a bank account to an encrypted version of the product that have one of these cards, this meant that they triggered the wallet to ask if the customer also had an ATM card. Anyone who wanted wanted to confirm a payment. If the cus- to load money onto their Mondex card had tomer agreed, the balance in their wallet to take their ATM card to the ATM, pop it was reduced, and the merchant’s balance

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was credited. Once the customer con- pro-social functions, which, while not the firmed payment, the key for decrypting the subject of this paper, were a key factor in product was made available to the custom- its growth.8 Venmo now handles almost er’s wallet and the product could be used. US$30bn per quarter and is still growing, As consumers spent money, it accumulated as shown in Figure 1. Venmo (and its rival in the merchant’s BarclayCoin account, Square Cash) are now embedded in US day- less Barclays’ commission, which was 25 to-day experiences. per cent. That charge may seem high, but In one sense, Venmo, while a break- it was typical for micropayment schemes through, is not a revolution: underneath its involving digital goods and, indeed, similar façade of convenience, everything is run- to the Apple App Store’s 30 per cent today. ning on the bank rails of debit networks The combination of technological lim- and automated clearinghouse transfers. itations and the rise of subscription business The failure of genuine alternatives such as models (which removed the need for micro- DigiCash and the continued growth and payments — one of the key uses cases for development of international card schemes e-cash at the time) meant that none of these and domestic payment networks meant that first attempts to create something truly new these rails carried more and traffic (success- went anywhere. The cryptographic solu- fully) and by the mid-2000s some observers tions were too complex and web browsers began to question whether any alternative did not support encryption or authentication to the bank-led payments infrastructure anyway.6 It looked as if no person-to-person would ever get off the ground. However, solution would gain traction. even before PayPal purchased Venmo, this Then along came Paypal and, eventually, question had already been answered by the Venmo. success of M-Pesa, the first mobile-centric person-to-person payment system.

Venmo PayPal was established in 1998 (as Confinity) M-Pesa to develop security software for handheld Back in 2003, Safaricom was the market devices such as the Palm Pilot. PayPal itself leading mobile operator in Kenya, with just was a money transfer service developed over half the market. The company had the within Confinity and, as The Economist idea of using mobile phones to make the observed at the time was ‘more like real distribution of microfinance loans in Africa digital money, because it allows consumers more efficient and submitted a proposal to pay each other as well as merchants’7 by to the UK Department for International transferring between customers’ wallets. In Development for matching funding. This 2000, Confinity merged with Elon Musk’s was granted and M-Pesa was born in a online banking startup X.Com, which soon feasibility study supported by Consult terminated other operations to focus on the Hyperion. The pilot launched in 2005 and money transfer business. The company, then within a year the scheme had 2 million renamed PayPal, went public in 2002. In subscribers and was handling US$1.5m per 2011, PayPal acquired the mobile payment day. The scheme, which allows people to player Zong (led by David Marcus, of whom deposit and withdraw cash from wallets more later) before adding Braintree and associated with their mobile phone num- Venmo to its portfolio in 2013. bers, has been an incredible success, with Venmo is a particularly interesting exam- more than two-thirds of Kenya’s adult ple of a peer-to-peer scheme because of its population using it and tens of thousands

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Figure 1: Venmo quarterly volume (US$bn)

of agents allowing consumers to pay cash store the data representing value as well as to into the system or take cash out of it. To authenticate access. put these numbers in context, it took banks What these and other e-cash schemes had in Kenya a century to create a mere 1,000 in common was that they needed someone bank branches, 1,500 ATMs and 100,000 in the middle to make everything work. credit card customers. A non-bank pay- Clever software people, building on ideas ment system founded on new technology from all of these schemes and more, were rather than legacy infrastructure changed keen to find a way to avoid this. However, people’s lives in ways that could not have they kept running into the same problem been envisaged by the people who cre- about maintaining the overall integrity of ated it, creating countless new services that the system. How to solve the authenticity would not have been possible without the problem without the tamper-resistant chips safe, fast and instant peer-to-peer money round the edges or a database in the cloud in transfer service.9 the middle? M-Pesa was electronic money that used In 2008, someone came up with a tamper-resistant hardware to authenticate genuinely new way to put together the access to wallets that hold the prepaid value technologies of digital money to give a (conceptually — the actual value is held decentralised software solution: the block- in commercial banks). PayPay was elec- chain. This brings the discussion, of course, tronic money that used software and some to Bitcoin. heavy-duty anti-fraud backend systems to authenticate access to the data representing value. DigiCash was electronic cash that Bitcoin used software: someone sent value to you, The Bitcoin story is, by now, well known. and you could do what you wanted with it. Person or persons unknown, under the Mondex, on the other hand, was electronic pseudonym ‘Satoshi Nakamoto’, published cash that used tamper-resistant hardware to a white paper setting out how to create a

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person-to-person e-cash system without a public key for verifying the validity of central system operator or database.10 transactions signed by the account holder At the core of the Bitcoin system were using a corresponding private key. Only three main concepts: to replace a central validly signed transactions are included on database with a shared ledger, to use a new the shared ledger, thus providing a mech- consensus technique to build that ledger anism for secure value transfer.12 One absent a central coordinator (the ‘Naka- can then build a crypto-asset layer on top moto consensus’ that uses ‘proof-of-work’ of that to link the values to something in to determine which version of the led- the real world. Note, of course, that this ger is correct) and to use a particular kind crypto-asset layer could be null and the dig- of mathematical puzzle to incentivise the ital value itself be the value traded, as in the proof-of-work. The technologies used to case of Bitcoin.13 Either way, one then has implement each of these concepts were all some form of digital asset that can be traded well known, but Nakamoto made a crucial without clearing or settlement and e-cash is breakthrough by combining them to embed one particular kind of asset that one can use the incentive mechanism into the consensus- to make a stablecoin. forming process (‘mining’) giving an energy to the ecosystem.11 This combination — the blockchain — was a revolution. USDC One aspect of Bitcoin that sowed the A good example of a digital currency built seeds for new ways of working is the intro- using a token-based digital asset is USD duction of programmability. For some Coin (USDC). This is a token pegged to the observers, the invention of what one might US dollar. A collaboration between Circle call smart money — money that has its own and Coinbase, it is intended to provide the apps — is actually much more interesting equivalent of the fiat currency for use over than the peer-to-peer payment system — the internet and public blockchains. USDC a point this paper will return to in due tokens can be redeemed for US dollars at course. any time. In practice, Bitcoin has struggled to find The reason for wanting to do this is clear. mainstream adoption beyond speculation. In the absence of an actual digital dollar of The Financial Conduct Authority’s mid- some kind, then bringing the current prime 2020 survey found that some 2.6 million currency to the blockchain means currency UK consumers had bought cryptocurren- can be moved anywhere in the world in cies at some point, and that a surprisingly minutes, bringing much-needed stability to high 1.9 million that still owned some, with the cryptocurrency world to facilitate use half owning more than £260 worth. These for payments and opening up new oppor- purchases are presumably highly speculative tunities for trading, lending, risk-hedging as cryptocurrencies are little used for ‘real- and more. world’ transactions. One of the reasons for The issuing and redeeming of USDC the lack of retail interest is the instability tokens is executed through an ERC20 smart of such digital transaction intermediaries, contract on the public Ethereum blockchain. hence the interest from many directions in The tree of e-cash, as shown in Figure what have become generically known as 2, has therefore evolved to the point ‘stablecoins’ that could in principle form where, in essence, the ‘meta-technology’ currencies for general use. means that anyone can now use cryptocur- In account-based cryptocurrencies (eg rency create their own e-cash of any kind. Ethereum), each account has an associated In that ‘branch’ of the evolutionary tree

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Figure 2: The digital currency tree

there is a value transfer layer that may or the Mona Lisa or gold in a depository may not be implemented using some form somewhere). Digital bearer instruments of shared ledger that makes for the secure can be exchanged by what the block- transfer of digital values from one storage chain fraternity insist on calling ‘smart area (ie the wallets mentioned earlier) to contracts’ (the term ‘consensus applica- another. tions’ is more apposite as they are neither In this formulation, then, e-cash is a dig- smart nor contracts). The general term for ital bearer instrument (whoever holds the these bearer assets is ‘tokens’. We have the cryptographic key holds the value, whether technology to make a central bank digital that value is a dollar, one-thousandth of currency.

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BRITPESA, BRITCOIN OR BRITDEX? options that are presented in context in Fig- There are various ways that a central bank ure 3, this is arguably the most interesting could implement a digital currency as part because it offers the potential for significant of a strategy to move to a cashless society (ie innovation. a society where cash is irrelevant rather than illegal). Way back in the 1990s, the model that was chosen for the Mondex experiment The UK way that began in the UK was to have the cen- Given these three alternatives, what should a tral bank control the creation of the digital central bank do? To use the specific example currency, but to have it distributed by the of the UK, what should the Bank of England commercial banks through their existing do? If one imagines that the economy of channels. This is what is known as the ‘two- UK might demand an e-cash infrastructure tier’ implementation. These days, however, capable of handling 100,000 transactions per it would be implemented using mobile second, what are the options? phones rather than smart cards — a kind of There is no problem managing this vol- BritDex. ume using BritDex for the obvious reason A cheaper alternative is to have the cen- that the transactions are peer-to-peer. Simi- tral bank create accounts for all citizens, larly, there is no problem with some form of businesses and other organisations. Imagine BritPesa. In China right now, Alipay han- something like M-Pesa but on population dles more than 1 billion unique customers, scale — BritPesa if you like, in the UK exam- with peak volumes in the region of 250,000 ple. This would be cheaper because it would transactions per second. When it comes to be completely centralised and the marginal BritCoin though, the kind of public shared cost of transferring value from the control of ledger used for mining and value exchange one personal organisation to another through simply cannot support the necessary vol- such a system would be negligible. Central umes, which means either building a ‘level banks do not really want to implement such 2’ network on top of it or using an alter- a ‘one-tier’ solution, however, because it native structure. The Bank for International would mean having to manage millions of Settlements’ report on the foundational accounts, and they would prefer somebody principles of CBDC notes that research else to do this and deal with everything else into scalability has shown that performance that goes with interacting with the general problems associated such public solutions public. The commercial banks and plenty of can be overcome with permissioned shared other non-bank players (for example, Alipay ledger networks.14 It further observes that in China) already have the apps, the infra- estimating future volumes and throughput structure and the innovative approach that requirements is complicated by ongoing would not only bring the digital currency to industry developments (eg payment requests the mass market but would also open up the generated by smart devices and the potential potential for the digital currency as a plat- for high-volume micro-transactions) — an form for innovation and development. interesting point beyond the scope of this Alternatively, there could be something paper. like USDC — a digital asset backed by cen- The Bank of England’s excellent recent tral bank reserves. This BritCoin would discussion paper on CBDC15 discusses a still be a two-tier solution distributed to ‘platform approach’ and quite rightly notes the public by the commercial banks, but that one of the key advantages of such an it would remain under the control of the approach is that it will help innovation central bank. Of the three practical CBDC throughout the ‘stack’.

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Figure 3: Options for a CBDC

How would this work? Imagine a merg- it is these providers (banks among them) ing of something like India’s UPI, M-Pesa, who interact with users. social media and the lifestyle apps com- Were post-Brexit Britain to create a ing from the Far East and one can begin British CBDC issued and managed by to develop a picture of just how power- commercial banks (as some form of digital ful such an implementation might be in all sterling should be a priority in the country’s markets. The Bank of England uses some financial rebuilding post Brexit), this would specific terminology which makes sense not use either the smart cards of the Mon- and will allow for constructive discussions dex days or the basic SIM toolkit and SMS between regulators, businesses and inno- technology of M-Pesa. Rather, it would vators in the payments space. In the Bank use smartphones, chatbots, artificial intel- of England’s platform model, it is assumed ligence, fingerprints, voice recognition and that the central bank runs the platform and all that jazz (or ‘biometrics, blockchains and provides what the Bank of England calls bots’ as I often unhelpfully and incorrectly ‘API access’ to this platform. The people paraphrase for management). allowed to access the platform are labelled It would not be that difficult or compli- ‘payment interface providers’ (PIPs) and cated to create a basic centralised CBDC:

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there would be a system shared by the HMRC), or parents may be able to commercial banks with the funds held in a set limits on their children’s spend- central account. Regardless of whether digi- ing or restrict them to trusted stores or tal fiat is the long-term future of money (and websites’.17 it probably is not), it seems prudent to get on with digital sterling, whether BritPesa or BritCoin or BritDex, and give everyone CONCLUSION access to payment accounts without credit If digital fiat were to be managed via some risk. Aside from re-forging the UK financial form of shared ledger to create a BritCoin, system in the white heat of new technol- then the Bank of England’s comments ogy, there is a very good reason for doing suggest that it is not the shared ledger so. According to the Bank of England Staff but the consensus applications that will Working Paper No. 605: become the platform for radical innovation as they are used to implement new ‘CBDC issuance of 30 per cent of GDP, digital currencies. The Bank of England against government bonds, could per- is clear that it does not envisage the ledger manently raise GDP by as much as 3 per as a cryptocurrency platform, but it does cent, due to reductions in real interest say that the technologies of shared led- rates, distortionary taxes, and mone- gers might be the best way to implement tary transaction costs. Countercyclical it. Were such a system to come into exis- CBDC price or quantity rules, as a tence, its resilience and availability would second monetary policy instrument, become matters of vital national interest. could substantially improve the central It therefore makes complete sense to take bank’s ability to stabilise the business advantage of the new technologies and cycle’.16 construct a decentralised and robust solu- Aside from increasing gross domestic prod- tion. Each PIP would have a gateway and uct, there is another excellent reason for the option of maintaining its own copy of taking this step, which is that cash has no the shared ledger or accessing somebody API. Writing in the Bank of England’s else’s. All banks above a certain size would ‘Bank Underground’ blog, Simon Scorer be mandated to keep a copy of the ledger from the Digital Currencies Division made a and the PIP gateways would simply talk number of very interesting points about the to each other (through the normal proto- requirement for some form of digital fiat. cols of consensus chosen for the particular He remarked on the transition from dumb architecture), but there would be no cen- money to smart money, and the consequent tral system in the middle — no equivalent potential for the implementation of digital to real-time gross settlement that could fiat to become a platform for innovation, fail either because of management failings saying that: (as is usually the case), unforeseen technical problems or subversion by foreign ‘other possible areas of innovation powers. relate to the potential programmabil- As the Bank says, the most game- ity of payments; for instance, it might changing aspect of such an implementa- be possible to automate some tax pay- tion would be what it calls ‘programmable ments (eg when buying a coffee, the money’ and what I have previously labelled net amount could be paid directly to ‘smart money’.18 This is where the real inno- the coffee shop, with a 20 per cent vation will take place that will make the VAT payment routed directly to money of the future so very different from

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the money of today, and it will be very inter- References esting to see thinking develop in this area. (1) Bank of England (2020) ‘Central Bank Digital There are obviously overheads associated Currency — Opportunities, Challenges and Design’, Bank of England, London. with overloading the ledger with the con- (2) Birch, D. (2020) ‘The Currency Cold War’, sensus applications, but on the other hand London Publishing Partnership, London. it may be that there are some truly revolu- (3) Levy, S. (1994) ‘E-money (that’s what I want)’, tionary features that can only be delivered Wired, December, available at: https://www.wired. com/1994/12/emoney/ (accessed 3rd November, through such applications. The Bank 2020). suggests a compromise whereby certain dis- (4) Essex, D. (1999) ‘Big dreams for tiny money’, tributed applications are provided for the Computerworld, 13th December, p. 66. (5) Birch, D. (1998) ‘An experiment in micropayments’, use of the PIPs in order to give them infra- Financial Times Virtual Finance Report, Vol. 12, No. structure that they can then use to develop 2, p. 2. innovative end-user services and this seems (6) Green, M. (2018) ‘Thirty years of digital currency: a good place to start. from digicash to the blockchain’, paper presented at IACR Eurocrypt Conference, Tel Aviv, 29th April. It would be good to see the Bank of (7) Economist (2000) ‘E-cash 2.0’, Economist, Vol. 354, England take the global lead in the race to No. 8158, 19th February, pp. 67–71. create money for the digital future, rather (8) Acker, A. and Murthy, D. (2020) ‘What is Venmo? A descriptive analysis of social features in the than continue with digitised versions of mobile payment platform’, Journal of Telematics and money from the analogue past, and I for Informatics, Vol. 52, September, DOI: 10.1016/j. one would bet on them to succeed were this tele.2020.101429. smart money to be built from translucent (9) Donovan, K. (2012) ‘Mobile money, more freedom? The impact of M-pesa’s network power transactions that deliver ambient account- on development as freedom’, International Journal of ability for the new economy.19 Huw van Communications, Vol. 6, pp. 2647–2669. Steenis of UBS predicts a ‘three-horse (10) Nakamoto, S. (2008) ‘Bitcoin: a peer-to-peer 20 electronic cash system’, available at: https://bitcoin. race’ around the future of money, with org/bitcoin.pdf (accessed 3rd November, 2020). private tokens and CBDCs developing in (11) Brunton, F. (2019) ‘Emergency money’, in ‘Digital parallel with efforts to improve the cur- Cash — The Unknown History of the Anarchists, rent system (see, for example, SWIFT gpi Utopians and Technologists Who Created Cryptocurrency’, Princeton University Press: and the UK’s new payments architecture). Princeton, NJ, pp. 153–170. This is wise counsel, and there is indeed (12) Allen, S., Capkun, S., Eyal, I., Fanti, G., Ford, every possibility of competition between B., Grimmelmann, J., Juels, A., Kostiainen, K., Meiklejohn, S., Miller A., Prasad, E., Wüst, these approaches stimulating innovation in K. and Zhang, F. (2020) ‘Design Choices for the short term but then a longer-term con- Central Bank Digital Currency: Policy and vergence as the platforms for exchanging Technical Considerations’, Global Economy and Development, Brookings Institution, Washington, digital asset tokens are used to implement DC. both private and public tokens (including (13) Birch, D. (2018) ‘Who will make money? Tokens CBDCs). and the “5Cs” of future currency’, Journal of Thus, the long-term competition will Payments Strategy and Systems, Vol. 12, No. 2, pp. 111–121. not be between public and private versions (14) Bank for International Settlements (2020) ‘Central of digital dollars but between public central Bank Digital Currencies: Foundational Principles bank money tokens and private tokens that and Core Features’, Bank for International Settlements, Geneva. are backed by other assets. In this appealing (15) Bank of England (2020) ‘Central Bank vision of the future, there is nothing tech- Digital Currency: Opportunities, challenges nological to distinguish dollar bills from and design’, available at https://www. Bill’s dollars: one will be backed by risk-free bankofengland.co.uk/paper/2020/central-bank- digital-currency-opportunities-challenges-and- central bank money, the other by Microsoft design-discussion-paper (accessed 3rd November, revenues. 2020).

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(16) Barrdear, J. and Kumhof, M. (2016) ‘The (19) Birch, D., Brown, R. and Parulava, S. (2016) Macroeconomics of Central Bank Issued Digital ‘Towards ambient accountability in financial Currencies’, Bank of England, London. services: shared ledgers, translucent transactions (17) Scorer, S. (2017) ‘Beyond blockchain: what are the and the legacy of the great financial crisis’, Journal technology requirements for a central bank digital of Payment Strategy and Systems, Vol. 10, No. 2, currency?’, available at https://bankunderground. pp. 118–131. co.uk/2017/09/13/beyond-blockchain-what-are- (20) Steenis, H. (2020) ‘The new digital payments race’, the-technology-requirements-for-a-central-bank- available at: https://www.project-syndicate.org/ digital-currency/ (accessed 3rd November, 2020). onpoint/central-banks-digital-payments-by-huw- (18) Birch, D. (2017) ‘Before Babylon, Beyond van-steenis-2020-04 (accessed 3rd November, Blockhain’, London Publishing Partnership, London. 2020).

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