Tag: currency

Legal, tender and legal tender

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At the CSFI’s April “Fintech for Breakfast”, which was kindly hosted by the law firm Denton’s, an interesting topic popped up in discussion about Bitcoin. I’ll come back to precisely what the discussion was later on, but at this point I just want to note that it involved a core issue that often wanders into fintech chats: legal tender.

for Breakfast

Andrew Hilton (CSFI), Izabella Kaminska (FT), Emma Vartolomei (AllStreet), Winston Yong (IBM) and Angus Young (CSFI).

Who knows what “legal tender” means? Pretty much no-one, in my experience. I remember a story about a schoolboy who was chucked off a Welsh bus for trying to pay with a Scottish banknote. The bus company apologised, saying that “Scottish currency is legal tender” which, of course, it isn’t. Scottish banknotes are not legal tender in England or, for that matter, Wales. Only Bank of England notes are legal tender in England and Wales. Scottish banknotes are not legal tender anywhere, even in Scotland. In fact, Bank of England banknotes aren’t legal tender in Scotland either, because Scotland (which has a separate legal system) has no legal tender law although (and thanks to Colin Platt for this via Twitter) Royal Mint coins are legal tender in Scotland in thanks to the Coinage Act 1971 (Section 2).

No legal tender notes! Oh my goodness, it must be chaos! 

Actually, it isn’t. I’ve been to Scotland several times and I’ve often seen Scots buying things in shops using banknotes, cards and mobile phones. So not having legal tender laws does not seem to be much of  a barrier to trade. This shows how uninteresting the issue of “legal tender” really is in the modern age and for decades I’ve tended to assume that any article that talks about making a digital currency legal tender is written by someone who hasn’t taken this on board yet.

I do mean decades, by the way. If I cast my mind back to 2006, I can remember writing about the Snap Cafe in Georgetown, Washington D.C. This particular establishment had attracted my attention because it had decided to stop accepting cash. This is commonplace for forward-looking eateries today, but then it was a revolutionary act. As I reported at the time, the owner said that it had saved her time and money, meant she didn’t have to go to the bank any more and (most importantly, I suspect) didn’t have to trust staff she didn’t know. That point about trust is a recurrent theme in surveys of retailers and cashlessness: even if they perceive cash to be cheaper than electronic payments, cash has a tendency to evaporate. There was discussion around that time as to whether it was legal to do this, since Federal Reserve Notes (ie, greenbacks) are legal tender in the U.S.A. So, people said, the cafe owner could not refuse them, and some outraged comment asking whether it was legal to ban cash from an establishment.

Some time later, I remember an interesting clarification of the subject of legal tender in a useful paper on Payments and the concept of legal tender by Nick McBride, Legal Counsel, Reserve Bank of New Zealand. The paper describes something else that happened a decade ago, when the coins in New Zealand changed. The new coins were introduced on 1st July 2006. For a period of three months, the old coins were circulating in parallel with the new, but some retailers put up signs saying that they wouldn’t accept the old coins. This, presumably, was because they didn’t want the hassle of having to bag them all up and take them to the bank to swap for new coins. So could retailers refuse to take the old coins in payment even though they were legal tender?

The answer in both cases was that retailers can refuse to accept legal tender.

Wait, what? So what’s the point of legal tender then?

Well, the point is that you cannot force a retailer to accept legal tender or indeed any other form of tender. If, however, you buy something from them and there is no contractual barrier to the use of any form of tender, and you offer legal tender in payment, and they refuse it, then they cannot enforce the debt in court. That’s what legal tender means: it’s about discharging debts. If you incur a debt you can discharge it with legal tender, but you cannot be forced to incur the debt in the first place, if you see what I mean.

Another linked story from a decade ago was in Techdirt. Apple were refusing to accept cash for iPhones and insisting on credit cards conveniently had a link to the relevant U.S. Treasury page to explain the score to outraged citizens. In the U.S. there is no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Similarly, in the U.K. where only coins valued 1 pound Sterling and 2 pounds Sterling are legal tender in unlimited amounts you cannot force Apple or anyone else to accept them. They are free to enforce any conditions they like (within the boundaries of the law) with customers. When you buy a coffee from the coffee shop, you are entering in to a private contract. (Our good friend Leo van Hove made a very good presentation about this, called When Will Electronic Money Be Legal Tender? at our 7th annual Forum).

A couple of years later, the European Commission (remember that) put forward its recommendation on legal tender (22nd March 2010). It was, as I recall a banker saying, “strange and undesirable”. So, what is the European perspective? Well, the key points were:

  • Euro notes and coins are legal tender and retailers can only refuse them for reasons of “good faith” (for example, the retailer has no change).
  • Retailers should only refuse high-denomination banknotes in “good faith” (for example, if the value of the note is disproportionate to the purchase)
  • No surcharges should be imposed on cash payments.
  • Banknotes stained by the Intelligent Banknote Neutralisation System (IBNS) remain legal tender but should be returned to national central banks (as they likely come from a robbery).
  • Retailers must accept 1 and 2 eurocent coins in payment.

Sensible policies for a better Eurozone, you might think, but you’d be wrong. The essence of these recommendation was that shops will be forced to accept €100, €200 and €500 euro notes and 1- and 2-euro cent coins. Why? Well, because in many countries the shops don’t want them. In some countries (eg, The Netherlands and Finland) the retailers and the public seem to have, in a decentralised fashion, decided to abandon the 1- and 2-cent coins. They are nothing but a hassle and do nothing to assist commerce. At the other end of the scale, retailers in many countries will not accept high-value notes, partly because they don’t want to make change and partly because they are worried about counterfeiting. After all, if you are a corner shop and you get stuck with a bent €500 note then you are €500 out of pocket: the ECB won’t take your counterfeit note and give you a new one. It’s worth paying a few cents to the bank for a debit payment to avoid that risk.

I thought the Commission’s recommendation was dead in the water, largely because it didn’t take economics into account and I rather think that the EU’s goal for payment systems should be economic efficiency. Forcing your average tabac to take 500 euro notes does not contribute to that goal in any way.

Anyway, apart from people like me, and Professor van Hove and the European Commission, no-one much cared about legal tender one way or the other for another couple of years after the recommendation. Until Bitcoin came along.

Now, people say the silliest things about Bitcoin, such “the [insert name of distant country here] have made it legal tender”. No. Bitcoin isn’t legal tender anywhere and it never will be any more than Avios will be (and I’ve bought more cups of coffee with Avios – one – than I’ve ever bought with Bitcoin). I shouldn’t really be so sweeping, but I am tempted to say that the only reason that people say Bitcoin will be legal tender is that they don’t understand what legal tender is (and almost certainly don’t know what Bitcoin is either).

The media don’t help. A couple of years further on, in 2014, Britain’s Minister of Finance (a man of the people who for historical reasons is known as George Gideon Oliver Osborne, of the Baronetcy of Ballentaylor and Ballylemon in the County of Waterford, Chancellor of the Exchequer and Second Lord of the Treasury) gave a speech at an Innovate Finance conference in London, in which he said that he had instructed Treasury officials to hire some management consultants to knock up some slide decks looking at the benefits and threats of digital currencies. This was reported on as being interesting, although as I mentioned at the time he wasn’t clear about the benefits to whom or the threats from what. It was even reported on (in The Telegraph, for example) as “Chancellor embraces Bitcoin” and I remember one or two comments  along the lines of “British government may legalise Bitcoin”, which set me thinking, since I had already seen shops advertising that they accepted Bitcoin and it had never occurred to me that it was illegal (because, of course, it wasn’t).

There’s another aspect to the discussion. People like me think that Bitcoin is an interesting kind of property, not money. This brings us to Japan, which was the subject of the discussion at the CSFI breakfast, because someone mentioned that Japan is legalising Bitcoin. But what does this mean, exactly? I’ve read in several places that Japan is going to make Bitcoin legal tender. At least, according to that journal of record Sputnik News, which seems to be the origin of the claim. I’m sure this isn’t true. As far as I can tell, and as was confirmed around the CSFI table this morning, the actual story in Japan is that new provisions there consider Bitcoin a commodity and any such commodity that can be exchanged for goods and services or legal tender (my emphasis) will be considered a currency, bringing Bitcoin and many other cryptocurrencies into the normal course of business.

Sorry to be a spoilsport, but to the very best of my knowledge, Bitcoin is not legal tender in any country. Nor, I would wager, will it ever be. As I hope my quick trawl through the last decade has shown,  legal tender is an outdated and essentially meaningless concept, which is why I am baffled by the continued discussion of it. Businesses are free to accept to Bitcoin in payment, just they are free to accept wampun or used tea-bags, since it’s a matter of private contract, but they cannot and will not be forced to accept Bitcoin in settlement of debts incurred.

[Updated 8th April 2017 with clarification on coinage]

Making money for the masses

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The discussions around digital currency continue. I had an interesting sort-of-argument with someone about this recently, and I mentioned in passing the dynamics of the shift from specie to token money during the industrial revolution. I think it’s worth expanding on this here, as to my mind it informs the debates about central bank digital currency vs. private digital money, an important debate for our times. There’s lots more about this on the blog and there’s a podcast about it too if you are interested in learning more.

Forum friend George Selgin gave an excellent talk on this at [Consult Hyperion’s 2010 Forum], exploring the transition to industrial-age money.

[From The problem of change | Consult Hyperion]

The essence of George’s talk was that industrialing Britain saw unexpected changes in the way that money worked as it strove to re-invent money for its new economy. As the nature of that economy had changed, so the nature of money had needed to change too, but there is a lag and a tension between the needs of the economy and the money that the economy has inherited from an earlier age. At the time, it was not clear exactly what needed doing. People could see that there were problems, but not what do to about them.

Naturally I refer to this time because the Internet, mobile phones and online commerce are creating a vortex that is sucking in monetary innovation at an accelerating rate. My point is that we have been there before and can learn from those distant times. Consider the relationship between private and public provision of small change (coins, essentially) that has been brought back into focus by discussions about micropayments in an online world before. When that industrial revolution caused an explosion in population and commerce in Georgian England, the lack of small change shifted from being an annoyance to being a major national problem, holding back growth and development. Factories had no coins to pay their workers, workers had no coins buy their essentials and the economy was suffering. Josset’s description from “Money in Britain” (1962) is lovely:

Rarely was any transaction made without an argument. No trader would sell goods without stipulating the weight of the coins in which he was to be paid. Quarrels over money values were continuous; market days and fairs were regularly scenes of brawls. Wages paid by employers to their workers were the cause of many Saturday night disputes regarding the value of their money. Such was the result of the apathy and ignorance of the government in so neglecting the currency.

Essentially, as I wrote before, it was Main Street vs. Wall Street as usual (there you go brining class into it again):

What happened in that case was that there was money for the wealthy (bank notes and gold and silver coins) but there was no money for the masses. You couldn’t by a loaf of bread or pint of beer with the banknote or a silver coin, so private industry stepped in to mint copper token money, and this money circulated particularly in industrial centres in order to (very successfully) facilitate wage payments and retail spending.

[From Up a gum tree | Consult Hyperion]

By the end of the eighteenth century, most of the coins in circulation in the Britain were counterfeits. Gresham’s Law meant that there was widespread acceptance of counterfeits because there were no legal coins in circulation and that the good counterfeits served a useful economic purpose. A shopkeeper might have four copper trays in his till: pennies, ha’pennies, good counterfeits of same and “raps”, or counterfeits that could not easily be passed on.

The government did nothing about it. The people who did do something about were technologists: those at the centre of the industrialisation storm, largely from Birmingham, which was the Georgian Silicon Valley. The nascent metal-bashing industry there, the emergence of organised production (Matthew Boulton’s factory) and the expanding skill base meant that the skills, techniques and supply chain for medals, buttons (and the machines to make them) could be readily adapted to coins. The industrialists used the latest technology of steam presses whereas the government did not. At the same time, the supply of copper (the world’s largest copper mine was in Anglesey in those days) meant that the right raw material was in the right place at the right time.

What was the result of this technological change? It was that coins changed from commodity money (ie, gold and silver to the face value) to token money (ie, base metals and alloys worth a fraction of the face value). And it was, crucially, the private sector that caused the shift, with the public happy to accept the token money that, presumably, no-one in the government would. (As an aside, George Selgin asks in his splendid book why the private mints put so much effort and invention into creating such good quality tokens and suggests that part of it was marketing: good-quality tokens were good publicity and advert for the skills of the companies.)

These tokens gained rapid acceptance and by the end of the 18th century  the problem of small change was almost solved with the official (or “Tower”) coins trading at a discount against the private alternatives. What happened then? Well around two decades later, the official government mint adopted token currency and began issuing modern coins. This is, I think, a marker for our age and one of the reasons why I am so certain that, at some point in the future, the government will adopt a digital money that is in widespread use in the private sector (let us set aside exactly which technology for the time being) as a national digital currency and make the final shift of cash from atoms to bits.

The reason that I am so interested in this particular case study is that I think it has tremendous resonance in the current day. We are living through the post-industrial revolution but we are still using the money of a different age. Just as people in the early 17th century couldn’t have imagined the Bank of England, paper money and the Gold Standard that were just around the corner, so we can’t imagine the money of the near future.

Bank of England Charter sealing 1694

Somewhere out there, private enterprise (a student in a garage or a researcher in a regtech) is working on the money for the post-industrial age but we don’t yet know what it is. I’m pretty sure it’s not Bitcoin, and I’m pretty sure it will have something more to do with the communities that it serves than the fiat currencies of the nation-state do, but I don’t know what it is any more than anyone else does. However, it is interesting to speculate that the trajectory might replay. There will be competition to produce the money that the new economy needs and then when that competition means it’s no longer possible to make a living from the means of exchange because the transactions fees are driven down to zero, it will become some form of public good (even if the definition of public is more limited to “public within multiple overlapping communities”).

In which case, the world’s central banks might at well starting providing digital money as a public good now! Seriously, how much would it cost to set up Bank of England PESA? They might even look at some form of shared ledger solution, where copies of the “national ledger” are maintain by regulated financial institutions (e.g., banks – whereby taking part in the consensus-forming process would be a condition of a banking licence) and the entries in those ledgers related to transfers between pseudonymous accounts (i.e., your bank would know who you are but the central bank, other banks and auditors would not). I think this is just the sort of topic that we should explore at the twentieth annual Consult Hyperion “Tomorrow’s Transactions Forum” in London on the 26th and 27th April 2017, so you should probably block those days out in your diary right now…

Cryptocentralbankdigitalcurrency, or something similar

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In the speech that the Governor of the Bank of England eh, Mark Carney, didn’t give to the Mansion House in June he devoted some considerable time to the general topic of shared ledger technology, even going so far as to say that

In the extreme, a [shared ledger] for everyone could open the possibility of creating a central bank digital currency.

From Mark Carney: Enabling the FinTech transformation – revolution, restoration, or reformation?

I am not sure that I completely follow Mr Carney’s logic here and I don’t have the benefit of the expert advice that he must have received in connection with this statement but as far as I can tell, there are two entirely separate issues to examine here. The use of the distributed ledger for RTGS, which is the context in which it is mentioned earlier in Mr. Carney’s speech, is wholly unrelated to the provision of a central bank electronic currency and whether it might or might not be a good idea for the Bank of England to create such is nothing to do with the technology.

I suspect that the confusion may have arisen because of the tendency amongst management consultants (and others) to conflate the two entirely different kinds of electronic money: a crypto currency and a digital currency are very different things. If Mr Carney were genuinely suggesting that one of the scenarios under consideration by the Bank of England is that it abandons its responsibility for managing the creation of money and instead turns to a crypto currency, even if it is a crypto currency that is produced as a byproduct of a double permissionless shared ledger spawned by the Bank of England itself, then the value of that currency would not only be beyond political control it would be beyond the Bank’s control and one might imagine the Bank to be somewhat redundant in such circumstances.

The Bank of England is absolutely right to be exploring this new technology and I certainly think that it has something to offer. But that does not mean that the Bank of England is going to start using Bitcoin as a settlement system or that bitcoins will replace Sterling!

From RTGS NBG OMG SOS SLT PDQ SLAP | Consult Hyperion

On the other hand if Mr Carney were genuinely suggesting that one of the scenarios under consideration by the Bank of England is that it creates a digital currency, then I say more power to him. I cannot think of a single reason why such a digital currency would be a crypto currency or why it would be in any way related to the shared ledger used to process  the payments, but that doesn’t mean it wouldn’t be a cracking idea. A digital currency platform with right APIs in place (providing risk-free, genuinely instant and zero-cost transfers between accounts with final settlement in central bank balances) would be an amazing platform for a Digital Britain. 

Cash, CHF and chuffing hell there’s a $1000 bill

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This time last year there were approximately £70.5 billion in notes and coins “in circulation” in the UK. Now, there are approximately £74.5 billion in notes and coins “in circulation” in the UK. That’s a rise of 5.7% in a year when the economy grew by about 1.8% and the use of cash in retail transactions (retail spending grew 5.2%) was overtaken by the use of electronic payments. Cash is now only 48% of transactions, and the UK Payments Council say that this will fall by another third over the next decade.

Back to the same old question again then. What is this cash being used for?

Here’s a clue. A fifth of the currency “in circulation” is in the form of £50 notes, which you never see in polite society. As we have discussed before, only about a quarter of the Bank of England’s notes are used for transactional purposes so these £50 notes must be disproportionately concentrated in the non-transactional (i.e., largely criminal) uses. As everywhere else, high-value banknotes are a major cause for concern.

The EU Commission on Tuesday will pledge to investigate the suspiciously high number of the notes in circulation in the eurozone as part of a plan to choke-off financing for terrorists in the wake of November’s attacks in Paris.

From EU to probe €500 notes’ links to terrorism – FT.com

Back to another obvious question then. Why not make crime, terrorism, drug dealing, money laundering and bribing corrupt politicians marginally less convenient and marginally more expensive by getting rid of those high-value banknotes?  It is not only crazed electronic money maniacs who think this is right path to take, by the way. This kind of thinking is beginning to percolate up to the higher echelons of the financial establishment.

Mario Draghi, European Central Bank president, told the European Parliament on Monday that the matter was being studied by the central bank and that no decisions had been taken yet. “We want to make changes,” he said, adding that “we are determined not to make seigniorage a comfort for criminals.”

From EU to probe €500 notes’ links to terrorism – FT.com

What does he mean by this? Well, the “seigniorage” is the money earned by the ECB on the note issue. They sell €500 notes that cost them 10 cents (or whatever) to make. The €499.90 profit has to be invested in safe securities (government bonds, basically) and the interest earned on those securities is divided up between the eurozone members according to some arcane formula. The upshot of it all is that the stack of €500 notes underneath the Mafia boss’ pillow are earning interest for national governments. The governments are, in a very real sense, living off of the proceeds of crime. A no brainer then! Since this is clearly morally and ethically wrong, central banks are presumably wholly against it. Well, sort of. But you can see the problem that Mario faces if he does the right thing and cans the €100, €200 and €500 notes…

If we are right, the Euro will weaken, primarily against the USD and the CHF. The USD is the most liquid currency and we would expect it to capture a large share of the drop in the demand for the Euro as a store of value. However, the CHF could also benefit, having the largest note denomination in G10 economies.

From Kill the €500 note, weaken the euro | FT Alphaville

Ah, the CHF. Sooner or later the law-abiding nations of the world will have to institute sanctions against the Swiss for delivering convenience to the criminal and manna to the money launderers. I’ve just been in Switzerland and I never even saw a CHF note or coin: I used cards everywhere, and as far as I could see so did everyone else, except for the Arab gentleman who checked into the hotel in front of me and paid up front with three €500 notes. As I never see these in wild, I tried to grab a photograph of the check-in clerk running these through an anti-counterfeiting device that she had on the counter but she was too quick for me. The fact she had the device right there on the desk leads me to suspect that she sees more €500 notes than I do.

Swiss cash circulating is about five times that of Canada, and twice that of the euro area. At the same time, the rate of card use is among the lowest in western Europe — only a third of Sweden’s level and less than half that of the U.K.

From Rolex Buyers Needn’t Worry as Swiss Put Limit on Anonymous Cash – Bloomberg

The €500 isn’t the biggest note that desk clerk sees though. Switzerland has a CHF1,000. That’s right: a banknote worth $1,000. And you can spend it, too. Mind you, the Swiss have been cracking down: since January, you have had to show ID (how they verify the ID is beyond me) for cash transactions of $100,000 or more.

[then-Finance Minister Eveline Widmer-Schlumpf] spoke during a debate on an anti-money laundering law that came into force this year, establishing a ceiling of 100,000 francs on anonymous cash transactions. Charles Goodhart, a former Bank of England policy maker, said in December that the limit was so high that it could only be described as a joke.

From Cash Is Still King in Switzerland – Bloomberg

Am I taking crazy pills? The Swiss National Bank, the European Central Bank and the Federal Reserve should not be competing to be the currency of choice for Mexican drug lords, Albanian people traffickers and Syrian terrorist groups. Surely there is a moral dimension to this: all three should agree to reduce the maximum value of the circulating medium of exchange to EUR 50, USD 50 and CHF 50 and if they are not prepared to do this then the heads of the respective central banks should be prosecuted for conspiracy to support money laundering. It is time to get tough with these guys.

Reputation, ratings and currency

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I had the great pleasure of sitting next to Cory Doctorow once. We were taking part in some sort of roundtable about privacy and surveillance. I was excited about this because of my Edwardian policy on Twitter: I only follow people that I’ve met. I don’t follow companies, celebrities or computers. I only follow people, and I only follow people that I’ve met. Hence, there are lots of people that I want to follow, but I can’t because I’ve never met them. Needless to say, I was very happy to be able to start following him. I’m embarrassed to say that I can’t remember what the event was, but I do remember that Cory made some typically insightful and very well-phrased comments. He makes me think, and he did again with his recent piece for Locus Online.

Reputation is a terrible currency.

From Locus Online Perspectives » Cory Doctorow: Wealth Inequality Is Even Worsein Reputation Economies

Now, as you can imagine, since I’m very interested the concept of reputation currencies and the potential to find better ways to implement the functions of money in our connected future (or, to put it another way, identity is the new… well, you know) I was most distressed to read this headline. But it’s a brilliant piece, and it helps me to develop and clarify my own thinking still further, which is why I cannot resist sharing the thinking to test it further. But first, a bit of nitpicking since I am blinded by terminology, a reflect of my technological perspectives in contrast to Cory’s.

Currencies need to serve as units of account – so you can price every thing from vintage Star Wars figures to anti-fungal cream and calculate their total worth. They need to serve as media for exchange, so that someone who has Ken ner Star Wars figures and needs anti-fungal cream can convert one to the other. They need to serve as stores of value – so you can convert your action figures to something more stable that you can use in your dot age, in case Star Wars ceases to be cool in another 50 years.

From Locus Online Perspectives » Cory Doctorow: Wealth Inequality Is Even Worsein Reputation Economies

I’m not sure about this. A currency is a unit of account, but money can be a store of value (e.g., gold) without being a unit of account. None of the prices in my local Waitrose are quoted in gold, despite the fact that I intend to bury gold in my back garden in response to to government economic policies. Similarly, money can be a means of exchange without being a unit of account. In fact, for most of history, payments were commuted from stores of value that people didn’t have via a unit of account into a medium of exchange that they did have. The example that I use in a book I’m writing on the topic uses the example of the American Colonies where the unit of account was the Pound Sterling (which most of them had never even seen) and payments were commuted from gold (which no-one had) into wampun, the medium of exchange of the indigenous population.

Right, that’s got that out of the way. Now on to the actual point of Cory’s post.

Reputation is pretty much useless for any of these things. Instead, they’re literally popularity contests: ‘’more people like me than you, so I win and you lose”… The Internet has been trying to figure out how to make reputation work for decades now. Those scores that appear next to Ebay sellers’ names and on the profiles of ‘‘sharing economy’’ workers profile pages – Uber, Lyft, Airbnb – attempt to establish a basis for strangers to trust one another.

From Locus Online Perspectives » Cory Doctorow: Wealth Inequality Is Even Worsein Reputation Economies

I think these examples are excellent, and they illustrate a couple of key issues about the different between a real reputation economy and a “review economy” that Cory quite rightly suggests cannot function as a money substitute.

Ebay’s reputation system is one of the oldest surviving ones, and it’s a good example of how explicit reputation systems fail to solve their major problem. Most people who buy and sell on Ebay do a good job of it, because most people aren’t crooks. A few people do very badly, and get downranked and eventually punted off the system – something that a normal complaints tipline would handle just as well.

But reputation is useless as a hedge against the real nightmare of a setup like Ebay: the long con. It doesn’t cost much, nor does it take much work, to build up sleeper identities on Ebay, fake storefronts that sell un-remarkable goods at reasonable prices, earning A+++ GREAT SELLER tick marks, even for years, until one day, that account lists a bunch of high-value items on the service, pockets the buyers’ funds, and walks off.

From Locus Online Perspectives » Cory Doctorow: Wealth Inequality Is Even Worsein Reputation Economies

If I have behaved well for years and then leg it with your cash, that’s not a failure of the reputation economy, that’s just fraud. A failure of the reputation economy is that I can fraudulently claim a reputation that does not belong to me and you cannot tell. But suppose we had a genuine identity infrastructure so that when people register as sellers, even with multiple identities, they cannot forge reputations?

I don’t want to get diverted into technicalities at this point but I can see in outline how this sort of thing might work properly. I register with eBay, eBay bounces me to my bank (which of course implements strong customer authentication, SCA, in accordance with the relevant European legislation) and I successfully authenticate myself to the bank, at which point I’m bounced back to eBay with a unique virtual identity from the bank. The virtual identity isn’t “Dave Birch” (in fact it contains no identifying information whatsoever: it simply has a set of relevant attributes associated with the pseudonymous virtual identity: is_a_person, is_over_18, is_UK_resident, has_bank_account, or whatever else) it’s just a unique ID. If I set up another account with eBay, my bank will return the same ID. If I set up an account with AirBnB, my bank will return a different ID. Now when you buy something from me on eBay you can be comfortable that even if eBay doesn’t know who I am, they know someone who does. More than that, they know someone who had a legal requirement to put me through know your customer, anti-money-laundering and other filters.

I written about this many times before because I think bringing real reputation into eBay, airBnB, and goodness knows who else in the sharing economy, but doing so in a privacy enhancing way, would be of great benefit to everyone. In essence it would turn reputation into a currency because there will be marketplaces that I would not be able to enter, exchanges I would not be able to make, without that reputation. Money wouldn’t be enough.

Here’s a thought experiment to finish with. What if we take the concept of the reputation currency to another stage, a cross between Edward de Bono’s “IBM Dollar” and Nectar points. Why shouldn’t I be able to buy things with “Bank of Dave Money”? Obviously, it would trade at a pretty substantial discount to, say, “Bank of Madonna Money” because the public want Madonna to do things more than they want me to do things. Nevertheless, with computers and laser beams we should be able to work out the price of something in Waitrose. Perhaps instead of social security or a national minimum income in Sterling, the government would simply put a reserve price on its citizens’ currencies, so that it would guarantee a minimum price to Waitrose for “Bank of Dave Money” in payment of taxes. Stranger things have happened.


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