Guest Post

Fintech: Is the lack of trust the weak link of digital currency?

Chris Gledhill gives his vision on the future of Fintech

If you lived in a world where anyone could create its own freely circulating currency, would you trust digital money?

As part of the series of guest posts named Thoughts Leaders’ Corner, here is a very interesting article from Chris Gledhill, co-founder and CEO of Secco Bank. I hope you will enjoy it and if you are interested to the legal issues of Fintech, check my blog posts here!

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The other day I was watching my daughter playing with a group of children at her nursery. I didn’t quite follow the rules but it was a picture card game with the apparent objective of winning as many cards as possible. After a short while a couple of smug-looking kids (you know the sort!) had mastered the game and accumulated the majority of the cards to the obvious disdain of the rest, including my daughter!

I was waiting for the inevitable tears and tantrums, but instead something interesting happened – the children holding the least cards casually got up and walked away to go play a more fun game, leaving the now much-less-smug looking kids holding their (suddenly worthless!) cards.

I’d forgotten about the nursery incident until last week when I was reading an Oxfam report about global inequality. It contains this rather startling statistic…

In 2015, just 62 individuals had the same wealth as 3.6 billion people

…so basically half the world’s money is with 62 people. That got me wondering, how is this different from the nursery scenario? Or rather, what’s to stop the ‘have nots’ from simply wandering off and playing a different game? After all, it’s all just bits of card and paper, right?!

Not so fast! Don’t underestimate protectionism – Clearly if you’re doing rather well out of the existing system you don’t want a new system nullifying your position. Here’s a gentleman who experienced this first hand recently, Mikhail Shlyapnikov.

Mikhail is a farmer in a small Russian village called Kolionovo, about 100 miles east of Moscow. One day Mikhail gets hold of a colour printer and decides it would be a laugh to create a currency for his village called “Kolions”, a kinda fun form of IOU for bartering between his farmer buddies. It’s all going well until he is taken to court by prosecutors from the Russian Central Bank and ordered to cease immediately. His defence is that it was just a “game“. The RCB called it illegal and a threat to Russia’s sole legal currency, the ruble, but he pleaded…

One peasant can’t bring down the banking system,

Now it’s unlikely that Mikhail’s dodgy inkjet printed Kolion notes would have unseated the mighty Ruble, but that is not the point. What Mikhail didn’t know was that he had unwittingly challenged was a concept, not a currency. That concept is what we call “Bank” and it’s a license to create money.

When you strip away all formalities of his situation you’re left with a pair of colour printers. One in Mikhails’s barn and one in central Moscow, both churning out pretty paper. Who says one bit of paper is worth more than the other? Well it’s lots of people with guns working for people who have a lot of said paper! It’s the nursery school all over again only this time you can’t walk away so easily!

Is digital currency or Big Mac coin the alternative?

This is where my Bitcoin friends pipe up and extol the virtues of the cryptographic beauty of their favourite currency. True its decentralised nature solves, or rather mitigates the ability of incumbent authorities and regulators to go after the source and shut it down.

Unfortunately Bitcoin is as much a technology as an economic innovation so it has followed the Technology Adoption Cycle which, when applied to a tech currency, maps to a pretty daunting looking wealth distribution pyramid. In fact…

1% of the Bitcoin Community Controls 99% of Bitcoin Wealth

…so we’re not really solving the original nursery problem as the gameis already stacked in favour of early adopters and anyhows we’re just swapping one currency with another. One backed by military power, the other by computing power.

If we are going to really shake the status quo we’re going to have to look at it in a fresh way, or in the words of Matt Damon in The Martian..

going to have to science the shit out of this

So what if we didn’t have currencies imposed on us by the state. What if everyone, every business and every (internet of) thing could create their currencies. Not one that’s backed by force or computing power but by the reputation of the creator of the currency, like what we’re building in Secco.

Instead of a Russian Central Bank or a Bank of England or a US Federal Reserve we all become The Bank of Ourself (BOO). We have the ability to create value backed by our ability to deliver a product or service. For example a plumber could issue monetary units equating to an hour of their time or a musician could issue monetary units redeemable against one of their tracks. It creates a fuel to power the sharing economy and enables us to calculate value depending on the need of a service and the ability of the provider to deliver. Importantly the holding of a currency does not equate to our desire to take up the service offered, just like a bank note today is a promise to pay the bearer X equivalent in Y, even though we’ve little desire to do so.

The outcome will be a gold rush of currencies similar to the Dot-Com boom, a kind of Geocities for money. Those of us on the internet in 1996 will remember online communities like Geocities or Angelfire where anyone could get their own bit of internet real-estate and put up whatever content they wanted.

The majority of the personal sites didn’t get many hits, but a few sites from these communities and others from the early days emerged into movements in their own right, such as Craigs List which was originally just a list of events and classified ads in the San Francisco bay area and expanded to now serve 570 cities in 70 countries. What if the same happen for currencies? What if someone’s personal currency expanded to become the de facto global currency of choice? Perhaps a peasant really can bring down the banking system!

Here’s where we come to that important thing called Trust. Mikhail’s homemade bank notes work in his small village because everyone knows him and trusts him and that’s what promotes his paper into a currency. But what about outside of his village or even the other side of the world? Who is going to believe in Mikhail’s notes in Hong Kong? This is exactly why, since the dawn of coins, we’ve been putting a VIPs face (usually king, queen or emperor dude) on them, not the face of the chap or logo of the organisation that actually mints the coins!

So if you were to make a bet on who’s money would win out where would you put your, ahem, money? Well last month was the 30th anniversary of The Economist’s Big Mac Index. the BMI is a lighthearted tool used to gauge the relative value of global currencies. The theory being that wherever you go in the world there is a McDonalds and so the Big Mac is one thing that can be used to compare pricing across currencies.

Now let’s turn this around – suppose the big mac wasn’t a yardstick to measure currencies, but a currency itself, issued by McDonalds and redeemable by the bearer for 1 Big Mac.

It would be a globally recognised unit of value backed by the reputation of a globally recognised brand. It could just as easily be a Cappuccino Coin from Starbucks or CocaCoin. Holding these coins doesn’t mean you want big macs, it just means you trust the organisation in question to deliver on the promise the coin represents. It’s similar to what is happening in Sub-Saharan Africa with M-Pesa. It’s a tokenised representation of mobile phone air-time which has become a currency. Holding lots of M-Pesa does not mean you’re a talkative type, it just means you recognise the value of airtime.

In this multi-currency world an evolutionary force weeds out the weak currencies in a sort of survival of the trustworthiest battle. The result is a spectrum of individual, local, national, corporate and international currencies to choose from.

But hang on, isn’t a Big Mac coin a step backwards from something like Bitcoin as we’re heading back towards a centrally controlled currency and just swapping one state oligarchy for a corporate one. That is probably true and it’s just a transitionary state towards something much bigger, but if I were to bet my burgers on the next global currency to emerge before the end of this decade I’d go for Big Mac coins!

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Giulio Coraggio

I am the location head of the Italian Intellectual Property & Technology department and the global co-head of the IoT and Gaming and Gambling groups at the world-leading law firm DLA Piper. IoT and artificial intelligence influencer and FinTech and blockchain expert, finding solutions to what's next for our client's success.

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