The dollar, de Bono and digital currency

Many people think we are now coming to the end of what economists call the “Bretton Woods II” era of international monetary arrangements and, as The Economist observed recently, it is not at all clear what the next era will look like. The way that money works now is, essentially, a blip. It is a temporary institutional arrangement and it must necessarily change as technology, businesses and societies change. I am fascinated by the possibilities surrounding the digital currencies of the future and eager to learn more about the scenarios, so I was delighted to be asked by the Centre for the Study of Financial Innovation (CSFI) to write a report on digital currency for them in my capacity as their Technology Fellow. The result was “The Digital Currency Revolution”, launched this week. I took part in a video discussion about the report with Andrew Hilton, Director of this CSFI, and if you are at all interested in the topic I invite you to get a cup of tea, put your feet up and enjoy the video of the discussion.

Part of the reason for my delight and excitement at the CSFI’s invitation is that many years ago I picked up a report from the called “The IBM Dollar”, written by the inventor of “lateral thinking”, Edward de Bono. This had a tremendous impact on me, coming as I was from the technology side of electronic money. IBM, in de Bono's early 1990s thought experiment, might issue “IBM Dollars” that would be redeemable for IBM products and services, but are also tradable for other companies' monies or for other assets in a liquid market. When I read this, I felt as if scales were falling from my eyes. It hasn’t occurred to me that anyone other than a central bank could issue money!

When I read de Bono’s ideas of tens of millions such currencies in circulation, constantly being traded on futures, options and foreign exchange markets, it might sound as if the “money” would be unusable because transactions would be unbearably complex for people to deal with. But as I wrote in “The Financial Times” some years ago, that's not the world that we will be living in. This is not about transactions between people but transactions between what Jaron Lanier called “economic avatars“. This is a world of transactions between my virtual me and your virtual me, the virtual Waitrose and the virtual HMRC. This is my machine-learning AI supercomputer robo-advisor, or more likely my mobile phone front end to such, communicating with your machine-learning AI supercomputer robo-advisor.

These robo-advisors will be entirely capable of negotiating between themselves to work out the deal. Dr. de Bono foresaw this in his pamphlet, writing that pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction… the same system could match demands and supplies of financial assets, determine prices and make settlements. He also wrote that the key to any such a system would be “the ability of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties”, an early vision of what we might now call the reputation economy that I explored in one my previous books “Identity is the New Money”.

Now, two decades on from this description, we have a technology to implement and while the idea using cryptocurrencies as tokens linked to something in the real world  is hardly new (from the earliest days of Bitcoin people were using “coloured coins” to do this), token technology that creates “money like” digital assets does indeed change the calculus. When the current craziness is past and tokens become a regulated but wholly new kind of digital asset, a cross between corporate paper and a loyalty scheme, they will present an opportunity to remake markets in a new and better way.

It is reasonable to ask what will replace the IMF, central banks and commercial banks offering credit when it comes to creating money, facilitating payments and prosperity? This speculation is at the heart of my forthcoming book “The Currency Cold War”. The reaction of regulators around the world to one prominent potential competitor, Facebook's proposed “Libra” digital currency, seems to indicate that the incumbents are not going to give up without a fight and the topic of central bank digital currency (CBDC) has arrived on the front pages. And, I will suggest, CBDCs themselves will soon arrive in wallets. If not here, then in Asia where the People’s Bank of China has been active in the digital currency arena for many years (their’s is no knee-jerk reaction to Facebook’s plan).

Given the history of financial markets and institutions, given that we know that change is inevitable as the structures reshape under social, regulatory and technological pressures, is a Bank of England electronic medium of exchange (whether some sort of cryptocurrency BritCoin or some sort of centralised database BritPESA) the end of the story The answer must be “no". We are about to enter a new world where competition between currencies will become a new kind of Cold War where the tectonic plates of technology, soft power and economic hegemony are coming together to create a new and unpredictable landscape for the International Monetary and Financial System (IMFS). I hope you will download and enjoy “The Digital Currency Revolution” and I look forward to getting your feedback on my suggestions as to a way forward for the UK in this exciting and interesting “space race” for the future of digital money.