On Mondex and CBDCs (again)

Introduction (by Tim Richards)

We were delighted to get a lot of good feedback on Neil’s previous blog on Mondex Memories and CBDCs and its relevance to CBDCs and thought it would be interesting to respond to some of the more interesting – and difficult – points raised in a follow-up blog. Before addressing those I wanted to put the Mondex program into some historical context. They were very different days – we didn’t have an intranet until 1996, let alone internet access. There were no SDKs – although actually we did build a precursor to one of those – or APIs and the idea of remote payments was still in its infancy (although we did that too).

Back in the day – and in my case the day was 18th February 1991 – I became the most junior member of Neil’s small team specifying and developing Mondex and its associated technology. By the time we finished, a decade later, I was running the day to day operation of a large specialised software engineering group. What happened in between was that we helped – along with a lot of other clever people – lay the foundations for the modern retail payments industry.

When we started, based on the invention of Tim Jones and Graham Higgins and led by Dr David Everett, the technology we were dealing with was incredibly rudimentary. Making secure person to person transfers between smart cards was almost impossible with the smartcards of the day.  We had microprocessors with 2K of EEPROM and no cryptographic coprocessor support. The chips had no protections against any kind of error. My very first task was to figure out how to run RSA on one of those things to manage the Mondex cryptographic payment protocol (my answer, roughly, was you can but you probably want to go for lunch while waiting for it to complete).

By the time we finished, we had developed half a dozen unique smart card operating systems, culminating in Multos, with cryptographic support, data protection in both hardware and software, advanced memory management capability and fully firewalled multi-application execution, all certified to the highest security levels available and capable of running both Mondex and EMV at commercially acceptable speeds.

We were there before EMV, before Javacard and were the precursor to nearly every other development in payment cards ever since. Of course, it was a time during which there was lots of innovation in smartcards – there were many innovative e-purses out there being developed and I don’t intend to credit the Mondex team with the sole invention of these ideas. But we were unique in that Mondex was unaccounted, and that created some unique problems in design and the technology stack – and means that many of the ideas being discussed for CBDCs now were basic requirements for the Mondex program then.

Oh, and we survived being bombed out of the NatWest Tower in 1993! On to the specific points …

Lack of developer support

One of the points made in commentary was that Mondex didn’t succeed because it didn’t give the developer community enough support. We wouldn’t totally disagree with that – there were aspects of the commercialisation that struggled, largely because of factors outside of the control of the technical teams. And, of course, back in the mid 1990’s there was still a bit of a proprietary “command and control” attitude to these things. For a CBDC program to be successful it really does need to ensure that developers and third parties can engage effectively. 

A particular challenge for any retail payments system is to allow for ready integration with disparate merchant (bricks-and-mortar and online) systems. For a CBDC, if the central bank chooses to use the retail banks as a distribution channel then they must be enabled to offer competing apps while ensuring the integrity of the underlying assets. Beyond that ensuring that fintechs can access and use a CBDC will determine how widely it gets used. Central Banks have the opportunity to create some very interesting competitive situations if they do this well.

Blockchain and CBDCs

A number of good points were made, in relation to Mondex, about whether blockchain is needed to support CBDCs. At one level it’s obvious that the answer is no – a Central Bank, by definition, runs a centralised ledger. As one poster noted, Mondex didn’t need a blockchain to work. However, the underlying question is about accounting. With anonymised e-cash supporting direct peer-to-peer payments then you don’t know who has the value at any one time (this opens up some points on fraud management, which we’ll look at later).  If, at best, you only have an imperfect understanding of where the money sits at any given time then that raises some interesting questions about what is on the ledger at any given point.

Most people would probably want their transactions recorded to ensure that if they have a technology issue then they can get their money restored – but some people will want pure anonymous transfers.  In a solution available to everyone, then clearly it won’t be possible to mandate that everyone has a mobile phone and network connectivity (indeed the system needs to be resilient to communications failures). So – if value is distributed in anonymous locations what is the purpose of a centralised ledger? 

Truthfully, we don’t really see the advantage of blockchain in CBDCs. But you can see a line of argument that would suggest something less centralised. Although if you had a fully convertible cross-border CBDC structure then that might be different – you could, for instance, imagine spending sterling CBDC in Sweden and having the Swedish Central Bank run a node of a global blockchain for synchronisation with the Bank of England.  But, frankly, getting to that point seems like a big stretch from where we are today.

Might offline value with P2P payments lead to infinite money printing?

All technology is, ultimately breakable. When some hacker comes along with their quantum computer in a few years, the entire cryptographic underpinning of a CBDC would be broken. Right?

Well, maybe. But probably not.

This issue was at the heart of Mondex. If we assume – as we did – that all technology is ultimately breakable how do you prevent the unlimited printing of money? But of course, in a way, the same issue arises with printed cash. What stops someone from investing in cash printing technology and then running off an unlimited supply of £10 notes? (Google Operation Andreas for the attempt to do just that in the early 1940s.)

The answer with e-cash is the same – largely – as with real cash. Once you’ve bought your printing press (or quantum computer) you can make as much cash as you want – but distributing it without detection is another matter. Getting a lot of fake cash into the Mondex system was hard and, without revealing too many secrets, not all Mondex cash was the same, while maintaining the primary requirement for anonymity. Significant changes in the value in distribution could be detected quickly – although not as quickly as we could today – and addressed.  Just as a Central Bank would respond to a lot of fake tenners by withdrawing them and replacing them with new, more secure ones, so could Mondex. Only Mondex could do it quickly because, at some point, fake cash had to come into contact with real purses.

Obviously, the idea that electronic money can be forged is anathema to many. But if you want a CBDC that offers the properties of real cash then that’s an inevitable consequence. The question is not whether it’s possible but how much is tolerable and how you manage it. And, of course, Central Banks were – in the main – supporters of Mondex. They viewed it as a cash equivalent with better controls and visibility of money flows.  Without Central Bank support Mondex would never have seen the light of day.

What about privacy?

Mondex was anonymous by design, but that was back in the days before KYC and AML and all of the other compliance rules that now dominate the financial industry. At the time, as a bunch of young and idealistic technologists we saw Mondex as a way of preserving anonymity through electronic cash when all of the other electronic payment instruments were, as far as we could tell, accounted and therefore, ultimately, led to an identity. However, there was nothing in the Mondex design that prevented identity requirements being loaded on top of it.

From a CBDC perspective if the requirement is inclusivity then anonymity, in some sense, seems to us to be a requirement. That clearly runs counter to the prevailing culture of increasing compliance around identity in payments.  If there were an effective digital identity scheme in place that could assert that an identity was already in use in the scheme it would be possible to have CBDC accounts with spending limits on them – the problem is not limiting the spend on a single account but limiting the number of accounts that a single individual can access. Of course, that brings us back to digital identity, but that’s another blog entirely …

How the past (ticketing technology) can still be relevant in the future.

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Request to Pay’s Grand Tour

Earlier this year we were delighted to be part of the Consult Hyperion webinar on Request to Pay.  A common thread in post-event conversations that followed was an interest in the parallel developments of the UK and European flavours of Request to Pay and how they might work together.  With the launch of the European version on June 15th, we thought it an ideal time to signpost the bigger differences.

How Could Digital Currency Work?

The Bank of England and the UK Treasury have announced a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential British CBDC. But how could a digital Pound actually work? As it happens, this is something that Consult Hyperion knows rather a lot about. Apart from our work on the first British central bank digital currency (Mondex) back in the 1990s, our work on the first population-scale mobile money scheme (M-PESA) in the 2000s and our work on the most transformational contactless payment roll-out (Transport for London) in the 2010s, our practical experience across implementation platforms means that we understand the architectural options better than anyone.

Live 5 – Micro-Location

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In our Live 5 for 2021 we raised micro-location as an area of technology where we expect to start seeing significant advances being made.  UWB (Ultra Wideband) is just starting to get traction in consumer electronics and we believe that this will trigger innovation in micro-location technology.

Building SoftPOS – not as easy as you think.

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For the third year running, my colleague Gary Munro facilitated a thought-provoking debate around the use of mobile phones and tablets as contactless payment terminals during last week’s virtual Merchant Payments Ecosystem (MPE) conference. For the last three years, Gary and his panellists have tracked the progress of the SoftPOS technology and standards.  The three key messages that I took away from this year’s conversation were that:

Chip and PIN? Remember that?

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This weekend marks an anniversary. Although Consult Hyperion’s romance with smart cards had started many years before that, it will be fifteen years on Sunday that chip and PIN went live in the UK. I remember St. Valentine’s Day 2006 as if it was yesterday!

Merchant Payments Ecosystem 2021

When we look forward to 2021, it is no surprise that COVID-19 is the dominant factor. So far as the merchant payments world is concerned, the shape of the post-pandemic new normal transaction environment must be the key strategic consideration for stakeholders and I am desperately keen to hear the variety of informed opinion on this topic that I have come to expect at Merchant Payments Ecosystem every year. At Consult Hyperion we like to contribute to these conversations by providing a useful framework for discussion: our annual “Live 5”, our yearly set of suggestions for strategic focus. This year, we choose to look at the key issue of pandemic transformation and its impact of on the three key domains where our clients operate: Payment, Identity and Transit, together with (as is traditional!) a suggestion as to a technology that the POS world may not be thinking about but probably should be.

Will Brexit make stealing bank cards attractive again?

black payment terminal

A couple of weeks ago I wrote a piece for our friends at Smartex; ‘Brexit and the UK Finance’s proposed £100 contactless limit’. Perhaps a title more worthy of grabbing readers would be ‘Will Brexit make stealing bank cards attractive again?’

The pandemic has accelerated consumer behaviour that has been teetering for the last decade. The desire for contact-free (and therefore contactless) transactions, has meant a significant trend in consumers becoming comfortable with tapping their cards and perhaps more interestingly, their phones (devices/wearables). We’ve seen merchants switch from hand scribbled ‘cash only’ signs, to ‘please use cards (devices etc) wherever possible’. Some stores have completely rejected cash altogether.

Contact-Free: the backdrop to Payments, Ticketing & Identity in 2021

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It’s that time of year again: where’s it’s traditional to take stock and look to the future. At Consult Hyperion, we do that through our ‘Live 5’ process; where we look at major trends in business, technology and consumer attitudes and project them onto our areas of business focus, with twists of our own. This is more than a marketing exercise. It informs our advisory services, but also sets our own strategy, for example by determining what technologies are investigated, and protypes built, by our Hyperlab unit.


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