“What on earth is a digital pound?” I thought to myself while I was working on the Future of Payments Review last year “I thought my pounds were already digital….I can’t remember the last time I saw an actual pound coin.”
Then one day recently, I was reading about James Howells. James is petitioning his local council to allow him to rummage through his local rubbish tip to find the hard drive from his old computer. According to the BBC it seems that James accidentally dumped his computer hard drive in the rubbish tip, and the £227 million pounds of Bitcoins stored on it. James wants to get his hard drive back and has even promised the council some of the money if they will let him dig it out from under his local rubbish tip. Reading this story, if you will pardon the pun, the penny dropped for me. A digital pound exists in a way that my current bank ones don’t. We are about to go through a significant change in how money works.
Historians seem to agree that for most of human existence, we exchanged value through bartering – swapping things that we had with things that other people had. Goats, animal skins and so on. This was ok, but inconvenient and inflexible. So, roughly 2,500 years ago, we invented a way that we could convert all possessions into a single transferable form – a coin. There’s some debate about where and when exactly the first coins emerged, but it looks like it was somewhere near where Turkey is today. I particularly like these coins from Miletus which are made of electrum – a mixture of gold and silver.

However, the problem with coins is that they are heavy and apparently some merchants got so rich that they were weighed down by carrying them around all day. So, after about 1000 years of coin carrying, someone had the idea of looking after your coins while you go about your business, and giving you an IOU or ‘promissory note’ to reclaim them when you need them back. These notes existed on leather for a while and then people started using paper. In this way, the banknote was born (apparently during the Tang dynasty in China) . This new paper money was so convenient it was known as ‘flying cash’. Here is a picture of a Tang note:

Apologies to all the historians who will be screaming at my horrendous oversimplification of how money has evolved. My point is that the platform on which value is exchanged evolved first from barter, second to precious metals and third onto paper. For the last few hundred years, we have not carried money in a form that contains any actual value. Rather, we have carried a note that says that the bank has our money and will give it to us if we ask nicely…a £20 note is signed with words “I promise to pay the bearer on demand the sum of £20”. The piece of paper holds no value – it cost about 2p to manufacture. It is the promise that counts.

About fifty years ago, we started to digitise money. This means that the old paper ledgers which recorded our money were put on to spreadsheets. We went from paper and ink to Microsoft Excel. With the internet and mobiles, we are even able to see our number on the spreadsheet through our phones. But the actual money remains firmly in the bank. We are just looking at a number. If we lose our phone – or throw it into our local dump – it doesn’t matter. The bank still has the primary record of our money.
Then, enter crypto currencies – for example – Bitcoin. Cryptocurrencies like Bitcoin work in a different way. They use a technology where each unit of currency consists of a chain of data which forms a digital token. Importantly, each link in the chain is bonded to the one before using a unique form of encryption – a cryptographic hash. These blocks contain information such as who owns that particular Bitcoin. The Bitcoin can be read by different computers, but they cannot alter it. It is an encrypted token that exists on your device, but it can be read by other computers which can also confirm it is authentic. Each time the Bitcoin changes hands, a new link in the chain is added recording the transaction, and it is then securely encrypted.

Bitcoin was an interesting choice of name and positioning. Why ‘coin’? Perhaps because 2,500 years after inventing tokens for value called coins, a Bitcoin exists as a digital token on your computer. It is a series of data that you own and keep – rather than putting it in a bank. If the provider of your cryptocurrency goes out of business, or you throw your computer in your local dump, you will lose your tokens and their value. This is something of a worry for central banks around the world, who are starting to think that maybe they should issue some of this new money too. According to Forbes, there is over $2.3 trillion in cryptocurrencies today, which is about the same as the GDP of Italy or Brazil.
Blockchain is not the only way that money can be tokenised – there are other technological ways of tokenising money. But one way or another, it feels like we are at a tipping point regarding the form of money and payments. Tokenisation means that money will once again exist outside the bank vault – on our mobile devices and ironically – back in our pocket. We could call this new tokenised money ‘digital money 2.0.’
Not only is digital money 2.0 potentially more secure, but it is also more flexible. The nature of blockchain technology is that it could make a digital pound intelligent. For example, in theory, you could choose to give your children pocket money in digital pounds but make the money only spendable on fruit – not sweets. Or perhaps more interestingly, you could pay the deposit on a house, but only allow the money to become ‘live’ when the solicitor says that the transaction is complete. In its advanced state, digital pounds could save billions in transaction costs, reduce the scope for frauds and make retailing cheaper for merchants. It also potentially makes it much faster for merchants and businesses to receive their money when they get paid.

Mr Howells (Source BBC)
Throughout our history, from time to time, the way that we human beings exchange value between us has changed. From barter, to coins, to paper to digital and now to a new form of digital. One problem is that it is conceptually hard to understand the difference between digital money 1.0 and 2.0. There is (or should be) no difference to the consumer. I think of 1.0 as a record in a bank, and a payment today is just a message to tell one bank to reduce a balance and another bank to increase it by the same amount. With digital money 2.0, the token of data itself is updated to say who owns it. And you get to keep it.
It has the potential to be like a banknote that is personally updated and stamped to say that it is yours. Not only that, it has a microchip inside which means it will only be ‘spendable’ under certain conditions. And in time banks may choose to stand behind digital pounds in case something goes wrong – which brings us back to poor Mr Howells. According to the Guardian, he can see the funny side of binning £227 million. Howells says he threw out the hard drive in summer 2013 when he was clearing out his desk. “I had two identical hard drives and I threw out the wrong one,” he said. “I have to laugh about it now.”