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.

Mutable and immutable blockchains

Now we all know what the bitcoin blockchain is, don’t we? It’s just one particular version of the general class of blockchains, which share the characteristics that data is stored in blocks and because of some cryptographic jiggery-pokery the blocks are chained together, so that you can’t go back and change the contents of a block without having to then change the contents of every subsequent block. And depending on the consensus protocol that is used, you can’t change the blocks without everyone else agreeing to let you do it. Thus it is, as my colleague Salome Parulava describes it, “mutable by consensus”.

Whereas auditing at present entails the confirmation of transactions and balances on a company’s accounting ledger at the end of the period, a transaction on the blockchain would provide a permanent and immutable record of the transaction almost immediately.

From Blockchain and the Auditing Revolution – Real Time Audit within the Capabilities of Blockchain | Fintech Schweiz Digital Finance News – FintechNewsCH

The reason that this kind of structure is called immutable, even though it is mutable by consensus, is that it is computationally infeasible to go back post-consensus and make a change. Even if you obtain consensus and co-ordinate more than half of the “hashing power” in the case of bitcoin, and could in theory go back to the very first block, change it to send the bitcoins in it to yourself, and then go forward rewriting all of the subsequent blocks, it would take years and years of massive computing power. Someone could, in theory, treat all of the bitcoin transactions from the last checkpoint up until now as the wrong side of a fork. (For all we know, secret mining pools are As my good friend Gideon Greenspan pointed out to me, just because you could see that corrupt agents were rewriting history in this way it doesn’t mean that you could stop them. But it’s not a realistic attack. We can live with the description “immutable” to mean “theoretically mutable but not mutable under any practical circumstances that we can envisage”.

If you had a different kind of blockchain, however, you could design it work in a different way. It could be mutable by consensus, or mutable by a dictator, and it could be mutable in a computationally feasible way. This is what some researchers in the US and Italy have put forward in a paper called “Redactable Blockchain, or Rewriting History in Bitcoin and Friends” (5th August 2016). Giuseppe Ateniese, Bernado Magri, Daniele Venturi and Ewerton Andrade say: 

We put forward a new framework that makes it possible to re-write and/or compress the content of any number of blocks in decentralized services exploiting the blockchain technology. As we argue, there are several reasons to prefer an editable blockchain, spanning from the necessity to remove improper content and the possibility to support applications requiring re-writable storage, to “the right to be forgotten”.

We don’t need to go into the clever mathematics behind this. Just take forward the idea that you can use that clever mathematics to substitute for massive amounts of computing power that I mentioned above and can rewrite a block without having to go forward and rewrite all subsequent blocks. The well-known and well-respected outsourcing company Accenture has filed a patent on this idea with Professor Ateniese.

By allowing a central administrator to amend or delete information stored on a blockchain, the [outsorucing company, Accenture] says that its prototype will make the technology more attractive to the financial services industry.

From Accenture to unveil blockchain editing technique –

This announcement was met with widespread derision on social media, and I can understand why. One of the key reasons for considering a blockchain to implement certain kinds of financial services is that the state of the blockchain, the shared world view, is locked down and the end of each block. If the shared world view can be changed, it wouldn’t be useful for these services any more. Now, I can see why some people might want an accounting system that works this way (see, for example, the case of Kingfisher Airlines in India) but I wouldn’t have thought that society wants accounting systems that work this way at all. Why would you want a ledger that can be edited either by some group or subgroup of the consensus forming stakeholders or by some central authority? I can think of a few reasons, but none of them make any sense.

The financial services industry needs to face the question of how to balance the appeal of pristine accounting with the demands of the real world, where some things simply need to be struck from the records.

From Downside of Bitcoin: A Ledger That Can’t Be Corrected – The New York Times

Nothing ever needs to be “struck from the records”. If a bank makes a mistake — let’s say it accidentally opens a couple of million bogus accounts — then it can’t just go back and scrub the backup tapes and pretend it never happened. The way to correct a wrong debit is with a correct credit. The Financial Times quotes blockchain entrepreneur and serious player Blythe Masters, the former JPMorgan banker running Digital Asset Holdings, as saying of Accenture’s approach that “we think it is innovative and can strike the right balance between preserving blockchain’s key features and adapting it for real-world requirements within some permissioned systems.” But what are these real-world requirements within some permissioned systems that Ms. Masters is referring to?

I don’t think anyone would use the bitcoin blockchain consensus protocol that was designed for an open, permissionless  blockchain (i.e., proof of work) for a closed, permissioned blockchain so you would never need to edit it this way. My reading of the paper, from a not-a-cryptographer perspective, is that it does not deliver against the real-world requirements for permissioned systems in financial markets. The use cases that are set out in the paper are the need to remove child pornography from a public blockchain, the “right to be forgotten” and the need to consolidate records financial transactions. My feeling is that none of these are real-world requirements.

As for the first use case, this is not something that our clients need consider since none of them are proposing to implement critical national financial infrastructure on a public blockchain with arbitrary content controlled by unaccountable consensus groups. If, for example, a stock exchange were to implement a blockchain settlement system, it would not be of such a type as to allow members of the general public to store child pornography on it (or at least it wouldn’t be if it had people such as Consult Hyperion designing it).

What’s more, if a stock exchange were implemented on an editable blockchain, it would be utterly chaotic since at the execution of any transaction, no-one could be certain about the state of the ledger (since it would be possible for some future intervention to change it). My granny dies and leaves me IBM shares. I sell you my IBM shares. I use the money to buy a car. Then a decade later a court order overturns my granny’s will as it turns out she had a son that we’d never heard of. So we go back and change the blockchain so that the IBM shares belong to him instead of me. So now I didn’t have the money to buy the car. So I have to give the car back. But the car was scrapped… and so on. Interstellar overdrive… then I go back five years later because it turns out he wasn’t her son at all and now I want the blockchain changed to give me my IBM shares…

Richard Lumb, global head of financial services at Accenture, told the Financial Times that financial institutions and regulators would need a means to quickly correct errors on the blockchain before using it in securities markets. He gave the example of a “fat finger” trading error, or a trade assigned to the wrong counterparty.

From Accenture to unveil blockchain editing technique –

That’s not how you correct errors, by just rubbing out mistakes. These are regulated financial institutions, not the mafia. No-one is going to build a financial services market on top of a mutable blockchain. In one of the comments I saw about this proposal, someone said that it would be OK because the market participants would keep an audit log of the changes and who agreed them. I thought that perhaps such an important log might need to be stored on an immutable ledger. Uh oh, blockchain Inception

As for the next use case, I am not a lawyer, but I think that the paper misinterprets the so-called “right to be forgotten”. However misguided the European Court’s decision on this might be, it does not demand the rewriting of history. If you publish an article about me that I think contains “old, inaccurate or even just irrelevant data“, and I manage to persuade Google that it should be harder to find, then the article is not deleted. The link to the article is removed from Google search results but the article is still there. Here, for example, is the Daily Telegraph’s full list of stories that have been removed from search results.

Newspapers are not required to go back and tear out articles from their archives, they are exempt (but in Europe, Google opted not to be regulated as media company so is not exempt). And I’m sure none of us what would to live in a world where politicians could obtain court orders to go back a change the historical record! When it comes to the serious use cases (e.g., revenge porn) it is already impossible to purge the matrix and it won’t make any difference whether they are stored on a blockchain or not (although with a permissioned blockchain you would at least know who had put them there and therefore who to arrest).

The third use case, the consolidation of financial records is not clear to me at all. Since the invention of double-entry bookkeeping, the whole point of keeping a ledger has been that you have a record of all of the credits and debits that contribute to the current world view. Companies do not delete old transactions every few months to save space. In fact the law requires them to maintain the transaction records for years. Here’s one example: in the UK, the “direct debit guarantee” has no time limit at all, so all records relating to direct debits need to be kept forever. If there is something about this use case that I haven’t understood, I would be genuinely interested to be corrected.

In summary, then. We all appreciate the clever mathematical tricks behind the mutable blockchain, but when it comes to the serious world of banking and financial services, it seems like (in the casual demotic of our unlearned age) a bit of a chocolate teapot.

Blockchain as a public technology service

When people say “blockchain” they mean different things. And some of the things they mean are just absolutely, categorically different. Implications of public open blockchain designs and private blockchain designs vary drastically. I emphasis this distinction because it is key – the different designs assume and imply totally different things.

Both types are important but for different reasons, for different markets and for different use cases. I think we have passed the time when “Bitcoin bad – Blockchain good” seemed an eye opener. What this kind of argument did is it drew the attention of financial incumbents from the Bitcoin-like permissionless space to the private, permissioned space. Which makes sense for their business models. But I think they are not paying enough attention to the permissionless space. I think you are not either!

A brave slide from the Consensus conference in New York this year (unfortunately, can’t remember the name of the speaker! – let know and I’ll update), where I chaired the panel on post-trade and my colleague Dave Birch chaired panels on Identity. This illustrates that “Bitcoin bad, Blockchain good” is not set in stone.

I bet you hadn’t anticipated such a steep rise of Ethereum (the price of native Ethereum currency soared 10 times from the beginning of 2015 and Ethereum’s market cap reached 1.5 billion dollars). You may have even missed the creation of the first human-free organisation. Even if you try to keep an eye on the public blockchain world, you only get reminded of its existence when Bitcoin price surges to its 2-year high (it now trades at over 700$) and all the mainstream media cover this.

Both public and private shared ledgers (Blockchains) are essentially shared book-keeping (and computing) systems, one class – open for everyone to use (public), another – restricted to a certain group of members (private). And this is it. Open for everyone to use means lower entry barriers, it means identity-free and regulation-free shared book-keeping (and computing). What could be restricted by identity policies and financial regulations goes around this. You can, say, restrict a person from buying bitcoins by setting high KYC requirements to online exchanges (for users not to be able to change dollars for bitcoins if they are not KYC’d). You can even cut his or her internet connection. You can issue a court order to close a business that accepts bitcoins as money. And so on and so forth.

A lot of this effort looks similar to trying to stop the Internet, but I suppose the regulators can dream!

Public technology service and native digital rights

“Proof-of-work is inefficient”. So what? Let it go! Think of what’s the idea behind it and what it tries to achieve, regardless of this inefficiency. Regardless – because even if proof-of-work is not ideal, there are other permissionless technologies already developed and many more that are work in progress. Some of best minds in the world are looking to provide the benefits of permissionless shared ledger environment without the drawbacks of original Bitcoin’s proof-of-work. Just assume that they will solve that problem and move your thinking on.

What the blockchain delivers is permissionless book-keeping (and computing) public technology service (with the unchangeable and transparent transaction history as an incredibly valuable side effect). When I say “public service”, I do not mean that a company or public organisation provides it, I mean technology itself and collaborative user effort provide it. In a sense – everyone and no one. The protocol acts as the service provider.

And this is crucial. In traditional financial world, the basic value transfer layer that cryptocurrencies (i.e. everyone and no one) provide as a public technology service, is provided by companies – service providers, and is not accessible to anyone. For example, PayPal provides digital value transfer service.

Here I want to make a point that permissionless cryptocurrency systems have a promise of a digital environment in which value transfer is intrinsic, embedded on the protocol level – and so, for users the ability to make a transfer could become what I call a native digital right. Just to give you an analogy (it’s not a very accurate analogy but you’ll like it!) – take a guess what you see on the picture below. Well, it’s a standard residential elevator in my mother country Georgia, where you need to pay every time you use it! Up and down. Every time up, every time down!

Georgian elevator. Each time you go up and down, you need to pay!

So maybe we all (all internet users) live in our kind of Georgia, where every time we want to make a deal (economic agreement) in the online world we have to go through a cumbersome process and pay an unreasonable fee (each time!) for it. We need to get our bag out, fill in our card details, merchant’s acquirer (if it’s a merchant – even more obstacles with peer transfers) needs to send a request, card issuer needs to approve the transaction etc. Our today’s economic life online is based on this very complex e-commerce domain. And to me, it looks a lot like Georgian elevator. Think about it: on top of the obvious, that elevator only accepts certain denominations of Georgian coins – very specific, and is broken every once in a while – so even if you want to use a paid elevator sometimes you just can’t. So familiar.

How great would it be if we had a native digital right to make a value transfer online that noone could take from us (or grant us!), on a protocol level. How many applications could be built on top (at Consult Hyperion we call them SLAPPs -shared ledger applications)!

Persistence of permissionless

At the heart of the public shared ledgers is value transfer. This is because in order to assure the liveliness and self-sufficiency of the system, while providing non-restricted access to it, there needs to be an intrinsic economic incentive for those who maintain it. In other words, there should be a positive value to maintaining consensus. Most public shared ledgers for this reason can be described as currencies (decentralised cryptocurrencies) because they provide this incentive as a reward on the ledger in the ledger’s own “money”.

The canonical example of such a decentralised cryptocurrency is, of course, Bitcoin (remember, there are hundreds of them though!).  As Bitcoin was intended to exist and evolve out of the reach of regulatory, corporate or any other centralised command, the technology includes mechanisms that ensure it persistently “survives” and proves its robustness and self-sufficiency. (Disclaimer: I’m not a Bitcoin maximalist)

This persistence is a differentiating characteristic of a public shared ledger system. The technology does not need people at tables making decisions in order to survive, it is “permissionless” (nevertheless, the way it evolves to an extent is influenced by “people at the tables” – just different people).

Virtual economy

Potentially the principal implication of this persistence is the permissionless ascent of alternative virtual economy on top of decentralised protocols. Cryptocurrencies are not just a new form of payment – but rather, it’s a potential foundation for a new virtual economy, with new forms of economic interactions coming into place. When I say “new”, I don’t mean substitutive – I mean additional.

Virtual economic activity could become something fundamental to the Internet. Similar to the way the ability to communicate transformed into the ability to communicate over the Internet – it could grow into the ability to make friction-less economic arrangements (“economically” communicate) in the virtual world.

Thanks to the shared ledger technology and “smart contracts” innovation, not only the emergence of alternative economy is permissionless (and so – non-stoppable), but if it happens at certain scale, the very nature of economic relationships in this economy could be drastically different from what we are used to. A good depiction of such transformation is content monetisation on the web through the use of “invisible” micropayments. Another good example is seamless online payments in video games:

Breakout Coin provides for seamless in-game payments anywhere in the world, while the blockchain technology behind it, Breakout Chain, uses smart contracts and sidechains to enforce these financial agreements between parties.


Shared ledger technology could even turn our things (as in “Internet of Things”) into active economic agents through smart contracts.

Public shared ledger technology may help to turn a big part of our (as it seems) non-economic life into an economic activities. 

Although there are many “if” in that, we should not dismiss this possibility quite yet and keep an eye on the permissionless space. You can observe or get involved, but it would be a mistake to put your head in the sand and deny that something incredible is happening.

Mining for what?

(Updated 6th May with reference to post by Dr. Craig Wright.)

As I am sure you know, the security of the bitcoin blockchain rests on a consensus protocol that includes a proof-of-work algorithm, and executing this algorithm (which is computationally very intensive) has become known as “mining” by analogy to gold mining (because of the bitcoin reward for the activity). Hence the idea of bitcoin miners.

On the edge of a tiny Chinese town is a strange building where you can get an insight into the future – and only a handful of people know what is happening inside.

From BBC – Future – We looked inside a secret Chinese bitcoin mine

By complete coincidence, on the very day that this story about a secret Chinese bitcoin mine was published on the BBC, I ran into the secret Chinese bitcoin miner himself at a not-at-all secret hotel in New York.

Secret Chinese Bitcoin Miner

Yes, it was Chandler Guo! As you may recall, Chandler won the coveted Toast D’Or at last year’s Money 2020 in Las Vegas (you can read the full story about it here) because he asked the best question from the floor.

Money2020 Toast and More

Anyway, he told me not to mention where the secret mine is, so I won’t, but it was interesting hearing him talk (as it always is) about how mining is going and the dynamics in the sector. Chandler mentions in passing in the BBC article that about three-quarters of the world’s bitcoin mining equipment is in China and that he is currently building a bitcoin mine that will produce about a third of all the bitcoins. What will happen to these bitcoins is anyone’s guess.

“The total addressable market of people who want to buy bitcoin is very, very thin,”

From What a Tech Startup’s Pivots Say About Bitcoin’s Future | American Banker

Indeed. And most of them aren’t in America or any other developed market. But what if it turns out that bitcoins aren’t useful as money at all, but as “anchors” for a variety of new and innovative cryptography-based services (one of which may be payments). The bitcoins will be useful because of the sheer volume of mining going on (since the security of the system rests of mining), not because they are coins representing any actual value.

Wait, what? Bitcoins might be valuable because they are not money? Well, yes.

I’ve said before, in my usual soundbite twitter-centric superficial and aphoristic way, that the future of money isn’t bitcoin and the future of bitcoin isn’t money. We don’t need to go into why I think this, although I will say that I think my early analysis of the technology for out clients has stood up pretty well over time. I touched on the topic again last month in a blog post “Is Bitcoin Money?” where I again said “will money as we know it be replaced by bitcoin? I sincerely doubt it” after a discussion about the functions of money. I started thinking about this again during a couple of the discussions at Consensus 2016 and then some pointed me towards a discussion thread about whether bitcoin is money or not. To be honest, I wasn’t that interested in reading it, but as I was bored on a plane I started to scroll down. It became mildly more interesting when someone mentioned John Lanchester’s piece in the London Review of Books. You remember, the one where he says “David Birch is the author of a fresh, original and fascinatingly wide-ranging short book about developments in the field, Identity Is the New Money. His is the best book on general issues around new forms of money, and new possibilities generated by blockchain technology”. (Which reminds me, I must write a blog post on John’s excellent piece…)

Anyway, while I skimmed some of the arguments, the core of the discussion was that an economic adviser to Jeremy Corbyn, the current leader of the UK Labour Party, said that money is credit and bitcoin isn’t credit so it isn’t money. I’m pretty sure he’s wrong about this (since it is easy to envisage non-credit monies), but that’s not my point. He also makes a point about trust, which is a good one and similar to a point made in a Forbes piece that I read a while back.

Why should anyone have more trust in a digital currency created by an anonymous group of coders accountable to no-one than in a democratically-elected government accountable to everyone? Why is an essentially feudal governance model “safer” than a democratic one?

From Bitcoin: In Technology We Trust (Maybe) – Forbes

So far so familiar to people I bore senseless about this stuff at parties. Then it got a lot more interesting when my old chum Izabella Kaminska from the FT stepped into the fray, pointing to something that Craig Wright (the man who may or may not be Satoshi Nakamoto) wrote on the topic.

It’s the first time anyone in the bitcoin world has actually made a compelling argument, with historical references. First, he describes bitcoin not as a currency or a commodity but as a security service.

From Tax Research UK » The problems with Bitcoin

I had not read the Wright piece before, so I had a very quick glance and then bookmarked it to read later. Unfortunately, there was no later as Mr. Wright has now canned his blog, but a correspondent found it using the wayback machine. Dr. Wright says “The mining of bitcoin is a security service that alone creates no wealth”. So to return to the point above, the sheer volume of mining going on (provided it does not become concentrated) means that there is a very, very secure piece of infrastructure out there. This infrastructure may be used to “anchor” all sorts of new services that need security as I said above. Some of them may be payments (as the Lightning folks hope) but most of them will not be. Now, while I think it unlikely that the bitcoin blockchain will be the final form of this infrastructure, that’s no reason not to experiment with it, in which case bitcoins will continue to have value even if no-one is using them to buy mundane goods or services.

Steam and shared ledgers

In my first official engagement as the Blockchain Meldrew, I was invited to the London Business School (LBS) to take part in a panel discussion on the technology with Ross Laurie from the accountants Deloitte,  Jay Best from Bitcoin people VentureBoost and Calogero Scibetta from one of my very favourite blockchain startups, Everledger. It turned out to be a lively and enjoyable discussion and with some great questions from the audience.

Blockchain Meldrew

If Roger Ver is the Bitcoin Jesus, I am the Blockchain Meldrew.

One of those questions led me to suggest to the students that they use the steam engine as a way of thinking about the blockchain in economic and business terms. I’ve often used the analogy of steam engine technology to explore the potential for replicated distributed shared ledger technology (SLT) and to explain why I am unconvinced that bitcoin will have long-term traction despite having to buy Matt Harris a ton of Danish pastries at Money2020 (I bet him that Bitcoin would be under $200 by Money2020 and was totally wrong).


I didn’t really make him eat all the pastries, the money went to charity!

Personally, I have no reason to imagine that Bitcoin is the cryptocurrency future of money any more than people might have imagined that the first steam engine, used to pump water out of mines, would be the steam engine used to power the Mallard locomotive to the world speed record for railway engines more than a century later.

There is one big difference though: Bitcoin is open, whereas the steam engine was encumbered by the patent system that retarded its development.  The lesson of history is unequivocal and well-studied. And that lesson is that the rigorous enforcement of patents around the steam engine slowed innovation to a crawl. Bolton and Watt made the critical invention that transformed that inefficient steam engine used to pump water into an efficient engine that could power an industrial revolution: the separate condenser. They patented it in 1777, and until that patent expired in 1808 there was virtually no innovation in steam engine design and the efficiency of working engines barely changed. In fact their patent gave them absolute control over the development of the steam engine and the result was an average performance improvement of less than 4% per annum. Once their patent expired, the rate of growth more than doubled to 8.5% per annum and the multiplying effect of exponential growth meant that the performance exploded to the point where you could put an engine on wheels and use it to carry passengers.

Not only did Watt use patents to hold back competition, his own efforts to invent a better engine were sabotaged by the same structures, since he couldn’t use the more efficient Pickard system (for converting rotary motion) until James Pickard‘s patent expired in 1794. For further reading, if you as much of a nerd as I am, start with “Collective invention during the British industrial revolution” by A. Nuvolari in the Cambridge Journal of Economics, vol. 28, no. 3: 347–368 (2004).

My point is this: Bitcoin is like pumping water out of mines and the bitcoin blockchain is like the Newcomben engine invented for that purpose. It is hopelessly inefficient but it does that one thing (pumping water) well enough to be adopted. However, someone will come along and invent a better and more efficient blockchain and progress toward the mass-market use of shared ledger technology (SLT) to both make some processes more efficient but also to create entirely new businesses. And, unencumbered by patents (unless the US Patent Office is daft enough to grant patents for trivial and obvious uses of SLTs) the progress will be rapid.

All of which leads me to reflect on my discussion panel at Money2020 where Richard Brown from R3, Alex Batlin from UBS and Simon Taylor from Barclays joined me to talk about the R3 consortium’s work in blockchains for financial services and their experiments to date with double-permissioned shared ledgers for banking. The very week before this panel, R3 had announced their Corda platform. It is not a blockchain.

We were Track 1

I got the easy panel to moderate.

Richard Brown from R3 will be talking about Corda next week at our our 19th annual Tomorrow’s Transactions in Forum in London next week. He’ll be joined in the shared ledgers session by Intel (we have been working on a very interesting project for Intel in the blockchain space) and Ripple. So if you want to tap in to the leading edge of serious business discussion on the topic, come along. As always, the Forum (this year sponsored by our friends from WorldPay, VocaLink and Oslwang) will be limited to 100 people, so head on over to register for a place right now. Thanks to the amazing generosity of the sponsors, it’s only £295 for both days – you’d be mad to miss Barclays, Mondo, Fidor, Equens, Clearmatics, the FCA, Shell, Samsung Pay, World Remit, Visa Europe, Curve and many others in an environment of genuine discussion, debate and learning. See you there.

Is bitcoin money? The debate continues…

Back in January, the International Monetary Fund published a report “Virtual Currencies and Beyond” which concluded that a currency such as bitcoin does not fulfil the economic roles associated with money. It is not a reliable store of value because of its volatility, although I personally could be persuaded over time that in some scenarios volatility could decrease to a point where it could become an acceptable store of value for some communities. The report goes on to note that bitcoin has very restricted use as a medium of exchange, and my interpretation of the widely available usage figures is that it remains primarily a tool for speculation (there is very little retail use, almost all bitcoin purchases are in Yuan and and almost all trading is currently carried out on two Chinese exchanges). As the IMF further point out, bitcoin does not seem to be used as an independent unit of account against which other currencies might be measured. Taken together these points suggest that bitcoin is better understood in economic terms as a peculiar kind of digital commodity rather than as money.

Send me money

If you want to give bitcoin a try, send some to this address!

I have a hard time seeing bitcoin as money and I’m not alone. In particular, regulators do not really know what to do with. Writing in the Southwest Journal of Monetary Economics, Charles Evans “The Blind Economists and the Elephant” attributes the problem in classifying Bitcoin to the multiple facets and the way each looks to different constituencies.

This confusion results from the fact that specific regulators oversee specific subsets of regulated activities. It is understandable that they would side with Easterbrook (1996) and view Bitcoin in terms of a preexisting category over which they have authority (Brito & Castillo 2013), rather side with Lessig (1999) and take a laissez faire, hands-off approach—in the post- USA PATRIOT Act, post-Dodd-Frank Act regulatory state (Zarate 2013)—until legislators draft new statutes or create some new regulatory agency to oversee this weird new stuff that defies conventional definitions.

An excellent point. The different regulators regulate on the basis of their own perspective and there is no holistic view or logical regulatory position on cryptocurrency (which is what the World Bank meant by “virtual currency”). Evans goes on to make an interesting comment that I think illustrates a very fundamental point about the interplay between technology and money.

Black (1970), Fama (1980), Greenfield & Yeager (1983), and Hall (1982a, 1982b) speculate that the historical functions of money—medium of exchange, store of value, unit of account, and measure of value—can be separated and that each function can be performed by different means.

I do too. One of the first things I ever wrote for a client on the topic of electronic money, a couple of decades ago, included the observation that technology would allow us to separate these functions and implement each of them in a different way, another example of the “back to the future” dynamic of a more interconnected world. We might find it odd to use London Loot as a medium of exchange and Islamic e-Gold as a store of value and US Dollars as a mechanism for deferred payment, but our phones won’t. As the former Governor of the Bank of England Mervyn King wrote in his recent book “The End of Alchemy”, money is a particular historical institution that developed before modern capitalism and owes a great deal to the technology of an earlier age. There is no reason why money should continue to work the way it does in response to technological change and no reasonable person would expect it to.

Will money as we know it be replaced by bitcoin? I sincerely doubt it, but I’m very much looking forward to hearing law lecturer Tatiana Cutts present her views on whether bitcoin is money at our 19th annual Tomorrow’s Transactions in Forum in London on 20th and 21st April. As always, the Forum (this year sponsored by our friends from WorldPay, VocaLink and Oslwang) will be limited to 100 people, so head on over to register for a place right now. Thanks to the amazing generosity of the sponsors, it’s only £295 for both days – you’d be mad to miss R3, Intel, Ripple, Barclays, Mondo, Fidor, Equens, Clearmatics, the FCA, Shell, Samsung Pay, World Remit, Visa Europe, Curve and many others in an environment of genuine discussion, debate and learning. See you there.

Scientific advice about the blockchain

The British Government’s Chief scientific adviser, Sir Mark Walport, has published his Government Office for Science report on “Distributed Ledger Technology: beyond blockchain”. In his report, Sir Mark focuses on a particular kind of distributed ledger, the bitcoin blockchain, and attempts to explain it to the general reader and then explore some of the potential uses. I’m particularly interested in his ideas about where it might be used in government, so I took the time to read through the report to examine, and learn from, his exploration.

A new report from the UK Government Office for Science has recommended a broad government effort to explore and test blockchain and distributed ledger technology.

[From Report Urges UK Government to Test Blockchain Tech – CoinDesk]

Personally, I found the report slightly confusing because it was jumping between ledgers, blockchains, the bitcoin blockchain and bitcoin almost on a paragraph by paragraph basis. I realise that I read the document from a very technical perspective and that I may see some of these things therefore in the wrong context, but I prefer Richard Brown’s term “shared ledger technology” as a starting point because I feel that the fact that multiple organisations share the ledger is more important than its architecture. I think the report might have benefited from some more description of shared ledgers, and the reasons why Moore’s Law and falling communications costs have made the core idea of everyone storing every transaction a plausible architecture. Here’s the way that we think about these things.

Birch-Pannifer-Parulava Four Layers

To be completely honest, I think our way of thinking about shared ledger technologies works well for a general audience. We use this layered approach to explain the key components of a shared ledger and then develop ideas around different choices in those layers. Different choices in consensus technology, for example, lead to a variety of different possibilities for implementing a shared ledger. In order to help categorise these possibilities, and narrow them down to make useful discussions between the strategists and technologists, we use a taxonomy that distinguishes between public and private ledgers. Rather flatteringly, Sir Mark uses a simplified version of the Consult Hyperion model of ledger technology (on page 19). However I think the report simplification is misleading in its classification and I’ve already had a couple of comments about this so I thought it would be useful to present the original model that we put forward one of the workshops that were input to the report. Here it is.

Birch-Brown-Parulava Figure 1

It might be considered reckless to disagree with the Chief Scientific Adviser, but on one matter I certainly do as the report refers a number of times to the use of bitcoin in a payments context but I just do not see this and, as I’ve written before, I certainly do not see cryptocurrency as a sensible government option for digital currency. Sir Mark says that permissioned ledgers (i.e., not the bitcoin blockchain) are appealing for government applications and I’m sure he’s right about this, although I am sceptical about some of the suggested government uses that are based on costs or efficiency. I think that his suggestions around applications that focus on transparency are the more interesting areas to explore in the short term and they would be my focus if I were looking to start exploratory or pilot projects in the field. I share the Open Data Institute’s view on this:

We agree that blockchains could be used to build confidence in government services, through public auditability, and could also be used for widely distributed data collection and publishing, such as supply chain information.

[From Comment: Blockchain technology is useful, but not for everything | News | Open Data Institute]

Anyway putting my nerdy criticisms to one side, Sir Mark’s conclusions (which are essentially that the technology is worth exploring in government contexts) are surely correct: shared ledger technology is a genuinely new way of doing things, and it will certainly lead to new solutions for the government just as much as for business. As for the government applications, there report focuses on five areas: protecting critical infrastructure, welfare, international aid, innovation and VAT. As I mentioned before, I am not sure that the areas that relate to payments should be the immediate focus. I can see that using replicated distributed shared ledgers would add robustness to critical infrastructure and there are certainly applications where a robust and immutable public record is highly desirable. I was fortunate to be asked to chair techUK’s “Blockchain 101” session last week, for example, where John Sheridan, the Digital Director at the National Archives explored just this point.

John Sheridan

Payments stuff is less clear to me. When it comes to VAT, for example, the report also mentions machine learning and quantum computing as techniques to reduce VAT fraud. I am in no position to judge but I would have thoughts that getting rid of cash would be a decent first step in closing the tax gap while we wait for quantum computing to track down the builders’ baksheesh. I do agree with the point about transparency though because sharing ledgers with regulators (and tax collectors) could help in a number of different ways.

When it comes to welfare I think that’s some of the ideas mentioned relating to digital identity are well worth exploring. There is a clear relationship between social and financial inclusion and this pivots on having a better identity infrastructure in place. It is entirely plausible that some form of bottom-up digital identity infrastructure that is built on shared ledgers could deliver better results than the identity infrastructure that we have at the moment or another attempted a top-down national identity system (while I am wholly in favour of a national entitlement system, that’s another topic).

When it comes to international aid, I suspect that once again the transparency aspect is of more practical use than the payments possibilities although obviously the high cost of international payments is an area where shared ledger technology could make a difference even if bitcoin does not. The idea of some form of cryptocurrency as a financial inclusion mechanism I think is something of a red herring. For the majority of the world’s population, M-PESA and TigoPay, AliPay and Zaad are much better ways to bring financial services to the excluded. Shared ledgers might have more of a role to play in the background, bringing interoperability into this space, something my colleagues have explored in this past.

But on to the last and most important point. Where I do strongly agree with the report is when it talks about market friction and innovation. Sir Mark highlights the potential around smart contracts and asset registration, and in our work for a number of clients (not only in financial services) this is the area that we have identified as most likely to be subject to longer term and more disruptive innovation. Remember the “4Cs” layer model at the beginning of the post? That top layer, the “contracts” layer, is where the unknown unknown lay. The work being done by companies such as Ethereum and Eris is only just beginning to explore the new domain of distributed, trusted applications and I don’t see why the government won’t be able to take as much advantage of this as anyone else.

So. In conclusion. Take the time to read the report (which kindly references my recent book “Identity is the New Money”, but that’s not why I think you should read it). There’s a lot of good stuff in there and it touches on many areas where the thinking is only just beginning. It’s great to see the technology being explored and taken seriously. Oh, and by the way, I wrote a piece called “it’s time to take stand against all the blockchain crap out there” for Finextra today, so read that too!

Reading between the blockchain headlines

If you are a bank, it must be very difficult it to work out what your strategy on the blockchain is. On the one hand, banks and accounting firms and analysts are saying that the blockchain is going to disrupt everything, but on the other hand it’s not entirely clear what any of these commentators actually mean. Here’s an example. A big story in Forbes on the investments in is headlined “Bitcoin’s Shared Ledger Technology” and then goes on to point out that the company in question is not using Bitcoin’s shared ledger technology:

Rather than using the public Bitcoin blockchain, it uses what is called a permissioned ledger

[From Bitcoin’s Shared Ledger Technology: Money’s New Operating System – Forbes]

The implementation here is a blockchain, but it’s not the blockchan (which most people take to mean the public Bitcoin blockchain). Here’s another example from last week. A cover story from Bloomberg Markets, featuring Digital Asset Holding’s Blythe Masters, one of the most important women in finance. The cover story says that “the blockchain” will disrupt everything but in the article Blythe refers to private blockchains (i.e., again not “the blockchain”) and then the article points out that her company bought Hyperledger, which uses a different kind of consensus method to create shared private ledgers.


It might be more accurate, I suppose, to rewrite the headline to say that “replicated decentralised shared ledger technology has the potential to revolutionise some parts of the finance industry and one part might be clearing and settlement because they are hopelessly inefficient” but I can see this is not as catchy. But let’s take on board that it is correct. It then leads us to pose a rather obvious question:

If clunky old procedures haven’t been replaced by computers by now, why would they be replaced by blockchain computers in the near future?

[From Blockchain for Banks Probably Can’t Hurt – Bloomberg View]

This is a very good question and it wasn’t really answered in those articles, so I thought that I would mull it over in a coffee break to see if I could come up with an answer that makes sense to me and has some consistency. The place I began was the not immediately obvious world of multi-application operating systems for smart cards. I remember that many years ago I was talking to one of our clients in the financial services world and I was observing that despite the existence of multi-application smart card platforms such as Javacard it was extremely rare to find schemes in place where applications from more than one issuer were side-by-side on the same card (as was the original dream of the smart card world). I asked our client why they had chosen to go down the multi-application route even though all of the applications were going to come from the same financial services institution. There were two parts to the answer. First, by using something like Javacard rather than a proprietary operating system they hope to reduce their development costs. Second, by using something like Javawcard they hoped to stop applications from interfering with each other, reading each other’s data or worse still messing up each other’s data. They weren’t worried about dedicated teams of crack Eastern European hackers wrecking the code, they were worried about their own development teams.

This imperfect analogy I think provides a window into the thinking implied in the Bloomberg article. Yes, it is perfectly reasonable to observe that all of the financial institutions working together could have simply put some money into a pot and built a big database that they could all connect to. However the history of such enterprises is littered with huge failures and fraught with large-scale risk. In the decentralised alternative, each institution can build applications that use its copy of the ledger to do whatever they want, safe in the knowledge that whatever they do won’t subvert what other institutions (or indeed other departments within their own institution) want to do with their copy of the ledger.

You can take this argument even further: why use a private ledger? Well, even if the ledger is wholly private it might still add resilience and transparency and some kind of standardisation that make it appealing in the round. Instead of putting all of the eggs in one basket, a more innovative and experimental environment is created where different companies and departments can work together in a safe way. Of course there will need to be some agreement on the language for ledger entries and so forth but I’m sure in these modern times it ought to be possible to create some sort of XML dictionary that can be inspected, expanded and exploited effectively.

All of this, of course, doesn’t answer the question as to why you would want to use a blockchain even if you decide you do want to use a shared ledger. That’s a much more difficult question to answer and while it’s not really the topic of this post (I will return to it soon, however), I think it is fair to observe that modern cryptography and modern computing might come together to deliver shared ledgers using protocols far more efficient for some contexts (and I suspect that securities settlement might be one of them) than the permissionless proof-of-work block chain that was designed to support the very specific use case of a censorship-resistant value transfer system.

The Dutch National Bitcoin, no, wait Blockchain Congress

Next year, I should imagine that the Dutch National Bitcoin Congress will be renamed the Dutch National Blockchain Congress, since that’s pretty much all everyone was talking about this year. Me included.

Bitcongres NL 15

I had a lovely day at the Congress. In the morning, Vicente Everts arrived with his Tesla for me to drive across to the the ING Headquarters, where the bank were hosting the event. Once we arrived at the HQ and parked up, Jeremy Bonney and I set about admiring some of the rather unusual works of art in their rather unusual building.

Bitcongres NL 15

1CP it is not. Once we arrived at the conference centre, I ran into old friend Douwe Lycklama from Innopay and I got down the serious business of working on a soundbite for the day. I came up with “The future of money isn’t Bitcoin and the future of Bitcoin isn’t money”. It’s a bonus if your soundbite can fit into 140 characters, for obvious reasons, so I thought this was a good day’s work. It was successful beyond my wildest dreams and is still being retweeted.  As it turned out, I had accidentally blundered into the Congress’ key meme.

Bitcongres NL 15

I settled down in the audience, in the special seats at the front reserved for payments VIPs of course, and found myself next to Conny Dorrestijn from our friend at Clear2Pay, which was handy as I don’t speak any Dutch, and she speaks it pretty well.

Bitcongres NL 15

And so began an excellent Congress. Great speakers, great panels and a great host. I genuinely felt that I learned something from every session and I honestly can’t say that about every single event that I get to go to. One of the things I learned was that no-one was much interested in talking about Bitcoin.

In a sold-out room packed with suits, the Dutch financial sector gathered to discuss blockchain technology, smart contracts, digital title deeds and shared supply chains — anything but the decentralized, stateless, bankless, community-driven digital currency. They even avoided the word “Bitcoin,” as if it were cursed. “The B-word” was the term du jour.

[From The Dutch National ‘B-Word’ Congress: ‘The Future of Money Isn’t Bitcoin’]

Vicente drove the day along at a decent pace and asked interesting questions to interesting people and (a key qualification for a host, in my opinion) was genuinely interested in what they said.

Bitcongres NL 15

Just to give you an example of the sort of things that were discussed instead of Bitcoin, in the brilliant first panel ABN Amro were talking about their pilot project to move trade finance instruments on to a blockchain. It was great to hear honest and open discussion about this whole new area of business with people who had practical perspectives.

Bitcongres NL 15

Actually, it wasn’t quite right to say that no-one mentioned Bitcoin, of course they did, even though the rhetoric was to my mind far less “religious” that I was familiar with from previous events. That’s not to say that the idea of Bitcoin as a revolution in the story of money had vanished. One of the presenters was the RTLZ journalist Frederieke Hegger who happens to be writing a book on the topic. I’ll be very interested to see how it turns out although of course I will need Conny to read it to me.

Bitcongres NL 15

There was an embarrassing incident in the middle of day. I’d been blathering on to all and sundry about how Bitcoin wasn’t money. But when the nice people at bitonic (use your iDeal to get Bitcoin here!) starting giving out free Bitcoins I was so excited that I tweeted about “free money”. Hoist by my own petard. OK, so it isn’t money it’s some weird kind of tradable commodity or something. But nevertheless, if they are giving it out free, I’ll have some.

Bitcongres NL 15

There were a few presentations that I’m still thinking about now. Lex Hoogduin gave a measured and thoughtful talk about money which pandered to my neo-Hayekian perspectives on private money.


Ruben de Vries from Blocktrail was thought-provoking around issues dear to my heart. I rather liked his formulation about transactions leaking a bit of privacy.

Bitcongres NL 15

Bas de Vries gave a nice pitch for FlorinApp which resulted in him being offered a job at a bank live on stage (he said no, by the way). I greatly resented his youth and energy and I’ve asked the organisers to insist on a minimum age of 21 for all presenters next year.

Bitcongres NL 15

However, in the end the best presentation I saw came from Fidor Bank. Fidor fascinates me because, as I come from the technology side of things, they have chosen to build their bank on a fundamentally different core banking architecture. The FidorOS, the “amazonisation” of banking systems and the customer community are all new ways of delivering services. And Michael Maier is a great presenter. 

Bitcongres NL 15

I added my own minor contribution to the day by focussing on blockchain applications. I tried to create a narrative thrust using “the glass bank” as the backdrop and then working though transparency and shared ledgers to get to the blockchain itself. I then recycled some blockchain applications that I’d heard about in different contexts and asked the audience to indicate which ones they believed in. The slides are online if you want to see them.

If you feel like killing some time, the whole event was filmed and you can see the video on the home page (my talk starts about two hours in if you want to see the audience responses for yourself).


My conclusion for the day is that people who say that shared ledgers will transform financial services are probably right but the people who say that the Bitcoin blockchain will do so might well be wrong. It was not at all obvious to me at the end of the day that the computational expense of the Bitcoin blockchain makes it the best implementation of shared ledger when working within reputation groups (i.e., financial services). It was designed to meet a very specific set of requirements to do with “cash”.

It’s like the first steam engine that was designed to pump water out of mines. People didn’t put that steam engine on rails and start shuttling miserable hordes from Woking to Waterloo. It was a steam engine, yes, but it wasn’t that steam engine. It was a steam engine with a rotary converter and a governor and so on (and I think we’re still waiting to see what that sort of blockchain might look like. The crucial improvement to the steam engine was the Boulton and Watt separate condenser. What is the equivalent for the blockchain? Ethereum? Maybe. Hawk? Maybe. I open to suggestions.

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