Let’s talk about digital identity with David Birch, Principal at 15 Mb and author, advisor and commentator on digital financial services.
In episode 75 David Birch discusses digital currencies – the differences between digital currency and cryptocurrency, the role in which identity plays in digital currency and the importance on identity verification within digital currencies.
“Digital currency needs some form of digital identity, that might actually drive digital identity forward and help digital identity to develop into the mass market.”
David G.W Birch is an author, advisor and commentator on digital financial services. Principal at 15Mb, his advisory company, he is Global Ambassador for the secure electronic transactions consultancy, Consult Hyperion, Fintech Ambassador for Digital Jersey and Non-Executive Chair at Digiseq Ltd. He is an internationally-recognised thought leader in digital identity and digital money. Ranked one of the top 100 fintech influencers for 2021, previously named one of the global top 15 favourite sources of business information by Wired magazine and one of the top ten most influential voices in banking by Financial Brand, he created one of the top 25 “must read” financial IT blogs and was found by PR Daily to be one of the top ten Twitter accounts followed by innovators (along with Bill Gates and Richard Branson).
His latest book “The Currency Cold War—Cash and Cryptography, Hash Rates and Hegemony” (published in May 2020) “paints a fascinating and stimulating picture of the future of the world of digital payments and its possible impact on the wider global and economic orders” – Philip Middleton, OMFIF Digital Monetary Institute. His previous book “Before Babylon, Beyond Bitcoin: From money we understand to money that understands us” was published in June 2017 with a foreword by Andrew Haldane, Chief Economist at the Bank of England. The LSE Review of Books said the book should be “widely read by graduate students of finance, financial law and related topics as well as policy makers involved in financial regulation”. The London Review of Books called his earlier book “Identity is the New Money” fresh, original, wide-ranging and “the best book on general issues around new forms of money”.
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Let’s Talk About Digital Identity, the podcast connecting identity and business. I am your host, Oscar Santolalla.
Oscar Santolalla: Hello and welcome to a new episode of Let’s Talk About Digital Identity. Today, we’ll talk about digital money, especially a type of digital money that I see that not many people are discussing today. Except, of course, our special guest who is David G. W. Birch. He is an author, advisor and commentator on digital financial services, Principal at 15 Mb, his advisory company. He is Global Ambassador for the secure electronic transaction’s consultancy, Consult Hyperion. He is Fintech Ambassador for Digital Jersey and Non-Executive Chair at DIGISEQ Limited. He is an internationally recognised thought leader in digital identity and digital money. Also, author of several books including his latest book, The Currency Cold War: Cash and Cryptography, Hash Rates, and Hegemony. Hello, David.
David Birch: Hello, Oscar. Thank you so much for inviting me.
Oscar: It’s a real pleasure talking with you and super interesting topic we’re going to discuss today about digital money. So yeah, let’s start a conversation. Let’s talk about digital identity. I would like to hear first, a bit about yourself and your journey to the world of identity.
David: Oh, sure. OK. Well, my background originally was in secure communications, and originally for military and government purposes. And then, of course, in the ’80s, that became part in the financial services sector was developing a networking and suddenly those skills were needed in financial services. And then I began to specialise in the area of payments, which are very, very interesting to me.
But after a while, I began to realise that a lot of the problems that we were facing in the payment sector, things like fraud and so on, were really not payment problems, they were really identity problems. And so, I became very fascinated by the world of digital identity, and how to, if you like, re-imagine identity for an online and interconnected world. And so that’s how I came to originally edit a book. And then I came to write a book about it.
And as time goes on, I’ve become… well, I’ve become more convinced than ever, that digital identity is the fundamental enabler for all sorts of new business, new ways of working and new society, but also a fundamental problem, because we don’t seem to have been able to fix it. And we all still struggle with passwords and logging on and scamming and fraud and all sorts of things. So yeah, so I began to realise that digital identity was really the fundamental problem needed to be solved. And then I became very interested in how to solve it in different ways.
Oscar: Yeah, super interesting. And as you said, there are problems that are dragging for many years already and we’re still dealing with those. But you are working with the very latest, as I said earlier, not many people here, what we’re going to discuss today, particularly in about digital money, there is a type called CBDCs digital currencies. So, could you tell us what is that?
David: People are very familiar with cryptocurrencies. And there’s lots of fun and interesting things happening in the world of cryptocurrencies. I mean, there’s also lots of crazy things happening and lots of and lots of criminal things happening. But nonetheless, the technology is very interesting. But cryptocurrencies are valued by the market. They have no inherent value. There’s– A Bitcoin is worth what people will pay for a Bitcoin. It’s not backed by anything.
A digital currency is something that’s backed by something. So, for example, you could have a digital currency like the circle, you know, USDC, where you have cryptographic tokens, but they’re redeemable for one US dollar. You could have tokens that are backed by commodities, like oil or gold or something like that. Or you could have tokens that are backed by goods and services, or future products and services, all sorts of things.
But in my very nerdish distinction, cryptocurrencies are backed by supply and demand, only. Whereas digital currencies are backed by something that has value, which might be another currency, it might be a commodity, it might be a company, or you know, whatever. Now, within that world of digital currencies, lots of central banks around the world are starting to think, “Well, we want our citizens to have access to new innovation, new ways of doing things, better ways of doing business. So perhaps we should look at making digital versions of our currencies.” And these are what people call digital fiat, because central bank currencies are what is called fiat currencies, or Central Bank Digital Currencies, CBDCs. I’ll use that latter word, because that’s what people– I mean, I know it’s longer, but that’s what people have come to use.
So, when we’re talking about Central Bank Digital Currencies, we’re talking about using some of the technologies of cryptocurrencies and crypto assets and decentralised finance and all that kind of thing. But we’re using them to transport these tokens which are backed by something else. And if you think about it, I mean the reason why lots of people want to do that is because it can be much more efficient to trade values across distributed ledgers in a decentralised manner, using decentralised finance protocols. You can easily see why this is.
Because after all, if let’s say, you buy a share in Apple from me, for you to get that share in Apple involves all sorts of third parties in different layers, you have brokers and dealers and market makers and front office and back office, and middle office, settlement and reconciliation, clearing, you know, you have lots of things that have to happen. But if I send you a token, that’s worth one share in Apple, it just goes from my wallet to your wallet. So, the financial services people, the serious financial services people are very interested in this because it’s a much more cost-effective way of doing business, not because of they have any ideological commitments but because it’s a lower cost way of doing business.
So Central Bank Digital Currencies exist in that world. And you know, the idea that you and I might trade through some protocols, in some sort of decentralised finance market, and I send you my token that represents an Apple share, and you send me some tokens that represent dollars. That’s not crazy. That’s where I think we’re going. And I think that’s what’s going to happen.
Oscar: Yes, seeing as a token, something simple one– something simple that can be, as you said, given directly from one person to another, it simplifies a lot what– how things are doing today, as you say, with the example of buying– you sell me, for instance, an Apple share, indeed. How does that token goes from you to me? For instance, I read one of your articles and you mentioned that it has to be offline, or not, it’s like device to device, or that’s known as…
David: Yes. So, this is– that’s a slightly different argument. So, if we say, well, OK, a Central Bank Digital Currency is a good thing. It would be nice if we had tokens that were pounds or dollars, pesos that we could exchange with each other. That’s good. But actually, if a central bank is going to provide those, and it’s going to provide them for all its citizens, not just some people that have nice computers and high-speed broadband, if it’s going to provide those for all of its citizens as a potential alternative to cash, then it has to satisfy some additional criteria. And in particular, it has to be able to work where there are no networks.
So, if you and I – I mean I always take a simple example, which is car parking. If I go to the underground car park, I want my car to be able to use digital currency to pay for its parking place. But in the underground car park, there’s no mobile signal. So, it’s annoying, when you try to use apps and things like that. A digital currency that’s going to be a cash alternative has to be able to function in a device-to-device mode, when there’s no mobile network, no internet, possibly even no electricity.
I should be able to transfer money from my phone to a merchant’s phone so that I can buy some milk, even when there are no networks, perhaps because of there’s a natural disaster or power failures or so on. Because otherwise, you’re not really providing a real alternative to cash. If it’s a real alternative to cash, it has to work everywhere all the time. And this means it has to operate in a device-to-device mode, so that I can send money from my USB stick to your phone, like direct by NFC or tapping them or I mean, whatever, you know.
Oscar: Yeah, it has to work with or without internet, as you said, right? Be the replacement of cash.
David: Yeah, yeah, that’s right.
Oscar: OK. And to also clarify, because many people have been, not only talking but also buying and selling cryptocurrencies, well until very recently, but yeah, it’s a term that has been used a lot in the last year. People get more familiar, maybe not everybody understand it but yeah, we have an idea what is a cryptocurrency. What are the main differences? You already mentioned a bit, but let’s say the top differences between cryptocurrency like the Bitcoin and the CBDC.
David: Well, like I said, cryptocurrencies don’t have anything behind them. They’re only valuable according to what people will pay for them. Their value is set by supply and demand. But digital currencies have a backing. And in the case of Central Bank Digital Currencies, that’s central bank money. So, if the Bank of England issues a Central Bank Digital Currency, that Central Bank Digital Currency will be backed by Sterling. You’ll be able to take your Central Bank Digital Currency tokens and get Sterling for them. They’ll be a reserve in Sterling. The real difference between cryptocurrencies and digital currencies is that digital currencies have a backing. There’s some asset sitting behind them that you can have access to. And in the case of Central Bank Digital Currencies, that Central Bank money.
Oscar: Yeah, exactly. That’s a core difference. OK, thank you for clarifying that again. And also, cryptocurrencies, well, I would say, anybody could create a cryptocurrency, right? Basically, you can. That’s why there are so many, too many. And many come and go. That’s how it is. But of course, the CBDC is very different that way. So, there will be rules on that. So are there already regulation rules on that, or what kind of regulation would come in?
David: So, in general, we need proper regulation of the whole sector, of course. But many of these finance people I’ve spoken to have said that when there is appropriate regulation in place, they intend to tokenize everything, equities, bonds, commodities, everything. Because trading tokens is a more efficient way of trading. So, lots of people want that regulatory structure to come into place.
In the case of Central Bank Digital Currencies, you can already see what that should be like, because in Europe, we already have the example of the electronic money regulations. We can already issue electronic money against reserves that are sufficient quality, what you call tier one capital or HQLA (High Quality Liquid Assets). So, we can sort of see what that regulation should look like. Basically, anyone will be able to issue a currency provided they have this backing. And in the particular case of Central Bank Digital Currency, I mean, bear in mind that no central banks really want to issue this to customers directly. They want to do it through intermediaries, like banks.
Any digital pound token that you hold, will be backed by a Bank of England pound. I imagine. I mean, who knows what exactly those regulations will look like. But I imagine those regulations will say that you’re not allowed to charge fees on transferring in and out, I think it will have to sort of say that. You know, I don’t know exactly what the regulations will be. But I can sort of see roughly what they will be. And in that case, I assume, and I think a lot of central banks assume this, the reason that those digital currencies will become worthwhile and useful, isn’t to replicate what we already have. Like, I don’t need digital currency to go to the supermarket. I already have a debit card, it works fine. You know, that’s not the issue.
But the potential for innovation with those currencies, I think is very real. So, if you imagine I mean, some people talk sort of loosely about imagining money with an API. And I think that’s an interesting way of thinking about it. If you have cash that has an API, then that would mean that there will be a whole, lots of creativity could come in that space. I’m sure even now, you know, students in a lab somewhere could be building some terrific new products and services. And you know, maybe I’m too old to imagine what those will be. But I sort of think of things like micro payments, I think will be a good example. But the idea of the regulation is not to create something which allows us to do what we do now. But to put in place a platform for innovation, new ways of doing things, new products and services in the future.
Oscar: Yeah, exactly. Yeah. One you already mentioned, you know, you are on the underground parking, yeah and you cannot use internet to pay electronically. There are many others like cases there’s no other solution today. Yeah, I guess that the most interesting thing to hear now is also what is the role of identity in this type of Central Bank Digital Currency?
David: Well, look, I mean, it’s very hard to imagine. It’s very hard for me to imagine that central banks will allow unlimited amounts of anonymous digital currency into circulation. And that would be catastrophic, because it would enable the criminals and terrorists and oligarchs to be free of any kind of control. And I don’t think any of us would want to live in that kind of society.
So therefore, there must be some kind of identity in the digital currency space. And in fact, I’d go further than that – we want some kind of digital identity in that space. It’s a good thing. And actually, the need, because digital currency needs some form of digital identity, that might actually drive digital identity forward and help digital identity to develop into the mass market.
Now, exactly what form that digital identity will take, that’s a very interesting subject for discussion. Should it be pseudonymous in some way? Who should know who these identities are? Who should be able to follow the transactions and manage them in this kind of thing? Those are complicated discussions, much too complicated just for a podcast. But you see what I’m driving at. There has to be some kind of digital identity.
And therefore, it’s good to start the discussion now, and bring the stakeholders together so that the stakeholders, and stakeholders I mean, not just banks and central banks, but I mean, law enforcement and citizens groups and lawyers and regulators. There are lots of people, because there are many issues around this to do with financial inclusion and this kind of thing. There are lots of issues that need to be resolved to get a Central Bank Digital Currency together. Identity is a really important part of that. And I think it’s useful to begin that discussion now so that people can have an educated and informed debate on how exactly that digital currency should work.
Oscar: Yeah, absolutely. I agree with that is a topic that yeah, not only people are talking about. And it’s, yeah, I think it’s going to happen. I think it’s something that you, every time you write, you say this is going to happen. From what I see, you could imagine from that not a desire option that this data currency is – it’s like cash, completely anonymous, going to pseudonymous and going to verify identity. It’s something still we don’t know who would verify. But yeah, it’s something– I agree with you there’s a lot of discussion have to be done now.
David: Yeah, I’m not saying, I’m not saying I know exactly what all the answer to that should be Oscar, like, where exactly we should set the dial? I do feel that we need to have an informed debate about where to go. I think the people who are the extremists, the people who say that digital cash should be completely anonymous are clearly wrong.
But simultaneously, the people who say that every transaction should be traced and monitored, they’re probably wrong as well. We need to figure out exactly where the balance lies. And I don’t think that decision should be left to technologists, like me, I think that decision should involve civil society. And it will take some time, people like the Bank of England are saying that a Central Bank Digital Currency could be sort of five years away. I agree with them. But you know, it could easily take five years to work out all of these issues as to how exactly it should all work.
Oscar: Yeah, it can be, as you said, five years and still, do you know, in some countries there is more progress or more work on that, or how is it around the world?
David: Well, look, I mean, I think, you know, in different parts of the world, it’s progressing in different ways, because there are different cultural attitudes to how this should all work. So, what people in America might want and what people in China might want, will be very different, I think with this sort of thing. So, around the world, it’s progressing in different ways.
In the sort of developed countries, I think that those debates actually have some time to go, I really do. I don’t think it’s going to happen tomorrow. It’s just too complicated and too important to get those decisions right. Decisions that we make about how exactly is Central Bank Digital Currency going to work? These are important decisions that have ramifications for a long time. So, I am a big fan of Central Bank Digital Currency. I want to see it, but I don’t need to see it now. I need to see it; I need to see it in the future working in such a way as to benefit everybody.
Oscar: Yeah, exactly. And I guess when you say, of course, some countries have more progress and Central Bank have more progress than others, of course, the ones who, yeah, have a right solution first, also we’ll take advantage like, that’s what I can– I could foresee. Yeah, it’s very difficult to see the future. What is your best way of foreseeing the first implementation, what kind of… yeah, how would you see it in practice?
David: We’re already seeing the pilot implementations in China, implementations in other places around the world. I think in the US and in the UK, my feeling is that we will choose privacy-enhancing technologies to be part of the infrastructure. So, if you talk to the technologists, they already have techniques, cryptographic blinding, homomorphic encryption, zero-knowledge proofs, this kind of thing. They already know how to do things in a more private way. What we need to decide is how exactly those will all come together to form the infrastructure.
But I’m actually quite optimistic about it, Oscar, because I think those technologies are already there. They already work. It could be that the legislators and the regulators may not understand how powerful those tools are or what they can do. But I do feel that we have the tools that we need. So once these stakeholders can come together and say, how anonymous or how non-anonymous it needs to be, then I think we can implement the relevant digital identity infrastructure. I think we already have all the technology; we need to do that. So yes, it will take a while, but I’m optimistic.
Oscar: OK. So, there are already some pilots in some countries. Interesting. Definitely have to… yeah, interesting for everybody, I think, to have a look at those. And yeah, be prepared. Yeah. Because I think no matter which job functions, we are, I think we have to, as you say, not only technologists take part into making the decision how this system is going to be designed. Yeah, definitely very difficult to see the future. But we’ll see quite a lot progress in, as you say, in five years from now.
Final question I would like to ask you, David, for all business leaders that are listening to us right now, what is the one actionable idea that they should write on their agendas today?
David: I think for most businesses that I’m involved with and because I do a lot of work in finance and payments, I think for most businesses, what they need to do is to have a strategy towards digital currency. They don’t need to implement digital currency right now, it’s downstream. But they have to have a strategy because we need them to provide input into that stakeholder consultation process. So, it makes sense for retailers, for people in the value chain acquires, issuers processes, governments, law enforcement, it makes sense for them to have their strategy towards digital currency, because we need that strategy as input.
So just because it’s not going to happen for four or five years, well, four or five years is not a long time if you’re a bank. So, what I would say to them is, you don’t have to do anything about digital currency tomorrow, but you do have to start building a strategy towards digital currency. I hope that’s helpful.
Oscar: Yes, I think if you’re– I agree with having a strategy, preparing for the next 5, 10 years when this will for sure happen. OK, well, thank you very much, David. It’s super interesting this conversation about the Central Bank Digital Currency. Definitely, we’re going to hear more and more in the coming months and years. Please let us know, for someone who like to get in touch with you follow you, what are the best ways?
Oscar: OK, excellent. Again, Dave, it was a pleasure talking with you and all the best.
David: Thank you for an interesting discussion, Oscar. It’s a pleasure talking to you.
Thanks for listening to this episode of Let’s Talk About Digital Identity produced by Ubisecure. Stay up-to-date with episode at ubisecure.com/podcast or join us on Twitter @ubisecure and use the #LTADI. Until next time.