David Birch, internationally recognised thought leader in digital identity and digital money recently sat down with Seamless Xtra’s Mark Dowdall. He is the author of The Currency Cold War (2020), Before Babylon, Beyond Bitcoin (2017) and Identity Is the New Money (2014).
David, your recent keynote speech at the Dubai Seamless Middle East show in May was on Metamoney and the Future of Digital Finance. What are your thoughts on the path finance is taking?
I’m generally optimistic. The reason for that is when I first got involved in any kind of financial services, I realised that basically all these problems are the same. Everything’s too slow, it’s too expensive, and it’s too opaque, and we need to fix all three of these to get the next generation. I mean if we are all on the same page the goal of fintech should be to help to reduce the overall cost of financial intermediation. But to do that, we have to have those three things in place.
I’m optimistic because the too slow part, I think to some extent, is fixed and being fixed. We now live in a world of instant payments across the region. You see faster payment services coming up and then you’ve got case studies like India which is demonstrating just what you can do regarding the infrastructure. There’s some work to be done on standards but the basics are fixed.
As for the too expensive part, there are two ways we can try and do something like that. We can regulate like in the EU where they’ve put a cap on it, and change (interchange) rates, or we can have more competition. And my natural inclination is towards more competition. We are already seeing the effect of things like M-PESA, in Africa, and you just have to look at what happened in China with WeChat and Alipay. If we could get that same kind of competition in other jurisdictions I think that would be great. Also, a big part of getting that extra competition is opening up the infrastructure to non-banks and non-financial services companies, which is why I do really think that this era of embedded finance is very good for everybody.
I think the third thing is problematic. Regarding the opacity we need to make things more transparent, but in a controlled way, so sort of squaring the circle of privacy and security. I think it’s been difficult to see how to move forward in that, but we have a toolkit of new technologies available to us now. Things like homomorphic encryption, zero knowledge proofs, cryptographic blinding, many of which have come out of the crypto space. We now have this idea that you can share data by sharing the proofs about the data and not the data itself. This idea that I can check that your bank is solvent by computing the assets against the liabilities without actually being able to read what any of those assets or liabilities are. Although it may sound borderline science fiction, we now have the tools to do that, and that gives us that final part. So that’s why overall I would say I’m optimistic.
Of course, identity comes into that too. That’s something that you’ve talked about a lot in your books. The idea that money is inextricably connected to our identities. Do you think that concept has accelerated even more recently?
It really has. If you take the overall total cost of payments as a percentage of GDP it is way too high. And one of the reasons for this is because there is so much money that goes into fraud and fighting fraud. At its roots, that’s an identity problem. It’s because we don’t have the kind of digital identity infrastructure that we need to do that.
But that’s also not the same as saying everybody should have an identity card and everything you do online needs to do with identity cards. So I’m not arguing that. What we want is a digital identity infrastructure using the latest technology so we can have things like self-sovereign identity and verifiable credentials.
We know how to build that kind of infrastructure, but we can’t complete the progress in those three areas I mentioned without the identity infrastructure. Quite often people say one of the big problems is that the internet was built without an identity layer, which is true. But the Metaverse won’t be built without an identity layer and that’s one of the reasons why I think you need to take the Metaverse seriously as a place to do business. It will have some of that infrastructure such as Web 3.0, digital identity, decentralised finance, tokens, which just means that it’ll be cheaper to do business there. It’s not an ideological thing. It’s just companies will find transactions are cheaper in the Metaverse.
I guess the Metaverse will have a role to play in taking the next steps towards a fully cashless society. How likely do you think it is and what are some of the key things we need to consider?
My thinking about that is that we really do need a strategy towards it because otherwise you have a problem. If you go cashless without a strategy, you end up with some marginalised and excluded groups. And that’s not good for society. So cashlessness needs to be part of an overall strategy, which obviously includes inclusion, and inclusion is about identity. Which brings it around to the same place.
Certainly, in the UK there are large chunks of the population who don’t see cash from one week’s end to the next. To a lot of people, we are already cashless but that doesn’t mean that we don’t need an overall cashless strategy. I think if you are a person who is trapped in a cash economy where everything costs you more or you can’t buy things online, for example, you are the person that gets effected most badly. You are the person that doesn’t have any insurance when you lose it. People talk about cash like it’s free, but cash can also be a problem too.
We’ve recently seen a lot of countries introduce pilot projects for Central Bank Digital Currencies. In fact, it was recently reported by the Bank for International Settlements that more than nine out of 10 central banks engaged in some form of CBDC work, last year. How successful do you see this being long term?
I think digital currency is something that’s more important than people think, but it’s also further away than people think. The Bank of England, who produce very thoughtful stuff on this, is saying this is years away because it’s such an important thing. It’s a once in a lifetime change, and so we have to get it right. I think you can ask the technologists how to implement it and if you want a fully anonymous digital currency or if you want a completely known digital currency or if you want something in between. Lots of technologists will know how to implement those but the question is what does society want? This is the kind of decision that needs input from civil society not just technologists or law enforcement or regulators. But then we need to know what civil society wants from it, and I think that’s going to require an education process.
David, who do you expect to drive this change and innovation going forward?
Well ultimately deciding what society needs should be driven by the government as the representative of what we need. The Bank of England’s original consultation on it pointed very heavily towards a kind of innovation agenda. And I completely agree with that. For certain things I don’t need a CBDC because my card works fine.
But this idea of money as a platform, that’s very new. If you’ve got a hundred dirham at home, there’s no API for that. Ten-pound notes don’t have an API. A hundred dollar bills don’t have an API. This idea that you can have money that has an API that people can build new products and services, I think is really interesting. And I certainly think we want to capture some of that energy that you see in the cryptocurrency space and bring it into the main street because there’s no credit risk, if you’ve got a hundred dollars bill, for example, as an API.
And rather than coming from a bank it could come from any person with permissionless innovation on top of that infrastructure. If I can send risk free money from someone to someone else, essentially for nothing over the internet, I would wager that people would find a way to build something special on top of that.
Given the pace of technological advancement over the last couple of years, financial institutions must feel the need to act quite quickly to keep up with the ever-changing landscape. Over the next 12 months what do you see as some of their key strategic priorities?
Well, I would say for the people that I work with, there’s probably three strategic priorities at the moment. And actually CBDC is number one because for a lot of organisations, although you don’t know quite what CBDC is going to look like, you know it’s coming. So in terms of strategic horizons, that means quite a big change. So you need to formulate your strategies around that.
The second thing is AI. Something I’ve said before is that the revolution in AI is when customers get it, not the banks. That’s come true sooner than I was thinking, and it’s by far the most disruptive, especially if you’re doing your scenario planning for a big financial institution. I’m particularly curious to see the strategic implications of the intersection of the basic AI.
The third thing is the Metaverse because it isn’t just the virtual world, it isn’t just that interface, it’s the actual infrastructure, like doing business in the Metaverse. Then there’s financial services in the Metaverse such as decentralized finance and tokenization.
I’m actually slightly more optimistic than I was, given the lack of progress on the digital identity side and the consequent inexorable rise of fraud. I am optimistic that we can now use these new technologies as part of the identity infrastructure and that hopefully will finally tackle the problem.