Banking when the bank is shut – Token maximalism

In this post I describe why freeing financial assets from the books of custodians and returning control of them to their owners as tokens could create significant benefits to an economy. This brings together concepts from traditional finance, cryptocurrencies, and enterprise blockchains.


Today, your digital financial assets (cash, equities, bonds etc) are trapped in the accounts of custodians who have a temporary monopoly over the services you are able to access. We have bundled together prevention of double spend with the provision of additional services. We can now split these services up: by recording financial assets as tokens with distributed bookkeeping, and where owners have direct control over those assets, we are able to free up the assets and put them to better use, increasing liquidity and utility value of all assets, increasing the competition for financial services, and potentially even increasing the quality and velocity of business done in an ecosystem.

The argument is as follows:

  1. Financial assets are trapped in account balances managed by specific custodians acting as bookkeepers, who have a temporary monopoly over providing services against those assets.
  2. Distributed ledgers allow the recording and transfer of assets with the prevention of double spend, without forcing the owner to use a specific service provider.
  3. Assets recorded as tokens can move more freely, increasing the liquidity and utility value of those assets.  Competition is increased, as asset owners have the ability to select (financial) service providers in real-time.
  4. Businesses who self-bookkeep assets as tokens may reduce their reliance on 3rd parties, allowing them to do business at their own speed rather than being subject to 3rd party drag.


Financial assets are trapped in account balances

Custodians. Traditional financial assets (money, shares, bonds etc) are held by custodians who manage the accounts of their customers. Custodians are special businesses, usually licensed and regulated, and they keep lists of who owns what. Among other things, they make debits and credits between their customers who hold accounts with them and they ensure that the same asset can not be sent to two different parties (the double spend). They are licensed to do business if they behave in certain ways as demanded by their regulators.

Cash custodians. Your bank (or building society or credit union) is your cash custodian. You don’t directly manage your own digital cash as files on your hard drive, your bank does it for you. You have an account with your bank and when you want to do something with your money, you instruct your bank to make a payment on your behalf, or when you want to convert your bank deposit into physical banknotes. They then may or may not act on your instruction, perhaps with a delay, and perhaps with a fee associated.

Asset custodians. Your non-cash financial assets (shares, bonds, etc) are managed by an asset custodian, often called a securities depository. They too have their business processes, opening hours, and of course fees. Usually households and businesses do not have accounts directly with the depository, usually there are other layers of businesses such as securities servicing companies, fund managers, and brokers who all add value and charge fees. For example, you may use a broker to find a fund manager who uses another broker to buy asset, held at a custodian who performs securities services on the asset which is held at the securities depository.

This chain of ownership can be complex and needs to be traversed each time there is an “event” with the underlying asset. If, for example, if you own a share of a company, and the company issues a dividend, somehow money needs to move from the company’s bank account to your bank account. This plays out as a series of debits and credits across potentially a number of banks, with the ownership of the cash changing several times before it ends up in your bank account.

Trapped. In all cases, your assets are trapped in the books of the custodian. In no cases do you yourself hold the asset (unlike with physical cash or bearer bonds). For digital assets, the “golden source” is always someone else. (Even with Bitcoin and public blockchain cryptocurrencies, the golden source of ownership is the respective blockchain, not your own hard drive, though you uniquely hold a private key which you use to create a payment instruction that the network will deem valid)

Operational costs. When you instruct your bank or asset custodian, it makes a decision whether it’s going to act on it or not. Usually it acts, sometimes immediately, other times more slowly, and usually for an implicit or explicit fee. Sometimes, for different reasons, your bookkeeper prevents you (or someone pretending to be you) from accessing our money, perhaps if you want to withdraw a substantial amount, or make a large payment, or make a payment to a beneficiary who the bank deems high risk, or perform unusual activity. This is not always necessarily a bad thing.


Custodians acting as bookkeepers have a temporary monopoly

When you have deposits in a bank and you want to consume financial services, at that moment you have no choice but to use that bank’s services. Your money is under the control of that bank.

Cash. For example if you have SGD 100,000 at Citibank and you want to convert it into GBP, you have to use Citibank’s FX rates. You can’t scan the market, decide that you want to use DBS’s more attractive FX rate, and have DBS do the FX for you. You would need to instruct Citibank to move the money to your account at DBS (assuming you have one), perhaps incurring a withdrawal fee, perhaps subject to delays or other financial or temporal penalties and drag, before seeing a deposit appear in your account at DBS.

Asset custodians. The same principle applies with other financial service custodians, but more acutely. Although in many countries, households are able to access banking facilities on an almost continuous basis, with the appearance of being able to make 24×7 real time payments, non-cash financial assets are less well served. Often, services are provided during traditional office hours. This is especially common for non-money financial assets such as securities. There are in general fewer asset custodians than cash custodians, creating what is in effect an oligopoly or in some countries a monopoly, leading to a stagnancy in innovation in the sector and a tax on the real economy.

Downtime. Sometimes for various reasons, your custodians are non-operational. Perhaps they are performing scheduled systems maintenance; perhaps it’s unscheduled maintenance; perhaps they have a bug; perhaps they are getting hacked.

At other times your bookkeeper is not open for business, either because it is their policy to be closed at weekends, or because of their IT or business failures or because they are being cyber attacked or they may not have enough liquidity (money) to support a large outgoing payment.

Irrespective of the reason, you’re stuffed and the matter is out of your hands – possibly you can’t do anything with your assets. This is one of the downsides of relying on 3rd parties. This happens more often than you might imagine. See: Bank of England, Reserve Bank of Zimbabwe, ANZ, ABSA, TSB (down for two weeks!), DBS bank, OCBC bank etc etc, or when other 3rd parties who provide intermediary messaging fail (Visa, Mastercard).

Source: Citibank iPhone app


Assets recorded as tokens can move more freely

Financial assets are just agreements. The vast majority of financial assets are digital-only, or “scripless” in the jargon. They exist as entries in databases of custodians rather than as bits of paper held in vaults. This digitisation is a good thing and has enabled innovation and competition. Financial assets can be represented digitally natively because they are nothing but legal agreements between issuer and owner. Even money is an agreement between the issuer (central bank, commercial bank, wallet, etc) and the owner. These financial assets are unlike physical assets (mangos, fish, lettuce etc) which cannot exist entirely digitally.

Tokenised. What do we mean by tokenised? In this case I mean that the assets are represented by lumps of data sitting in a ledger that is not managed by a single authority but instead governed by some agreed rules, which act to prevent the double spending of these assets. Often instructions are automatically executed by multiple parties in a network who need to agree with each other about whether the transactions fulfil the rules of the network (so called “smart contracts”).

Pedantry note: We use the word tokens to mean different things in different contexts. In the physical world, a token is the asset with value, eg a fairground ride token, a banknote, a casino chip. In the blockchain world, we use the word token but data isn’t passed from owner to owner, instead the tokens are recorded on a ledger replicated by a group of computers. When I pay you in BTC, I do not pass some data from my computer to your computer as I would pass a banknote from my hand to yours; instead I instruct the Bitcoin bookkeepers to essentially debit my account and credit yours (I know, I know, UTXOs but they are linked to account numbers). By this definition, the only “blockchain” platform that I am aware of that actually has digital tokens is R3’s Corda (Note: I work at R3 and I think Corda is great) where the data that represents the assets are passed from owner to owner in a peer-to-peer manner.

Moving more freely. If assets are recorded on a distributed ledger and controlled by private keys held by the owner, they are more free to have actions performed on them (eg transfer of ownership, accessing a service), without a specific temporary monopolistic custodian needing to be “awake”, and without being held hostage to the custodian’s speed, execution accuracy and financial and operational drag.


Tokenised assets can be more liquid

Liquidity. What does liquidity mean? It means that you can do what you want with the asset, whether that is sell it quickly at a predictable price without moving the market away from you too much, or whether it is easily and quickly giving it to another party (presumably in exchange for something). Cash in a bank account is fairly liquid (subject to daily limits, bank opening hours, cut-offs etc) whereas a physical house is less liquid. Physical cash is liquid as long as the party you are trying to pay is physically nearby; to make physical cash payments at a distance is troublesome.

Tokenised assets. If assets are tokenised on a blockchain platform that is open all hours and which is not controlled by a single entity but instead is governed by multiple competing entities (‘miners’ / ‘orderers’ / ‘notary services’ etc), and there is a defined way of interacting with that platform, you can do more with the tokens than with balances held in accounts controlled by single entities who may be non-operational. You can find more venues for trading your assets – they are more liquid.


Tokenised assets can have more utility value

Utility value. When is a dollar more valuable than another dollar? When you can do the thing you want to do with it. Ten dollars in your pocket does not have the same total value as ten dollars in your bank account, or $10 in your Uber wallet, or your $10 Starbucks voucher. Although they have the same nominal value ($10), they have different usefulness or utility value.

The relative value of those forms of money depends on what you want to do with it.

For example, if you want to buy lunch at a street food stall, and they only accept cash, then your bank deposit, Uber credit and Starbucks voucher are all useless in that scenario. They have a utility value multiplier of 0. Conversely, if you want to transfer money to your friend who is not standing right beside you, the physical banknote in your pocket is pretty much useless.

The Uber credit is great if you want to call a cab (yes, I know, hire a “private hire vehicle operated by an independent self-employed driver”, whatever), or buy some lukewarm food, but not good for much else. Likewise, the Starbucks voucher can get you your caffeine or sugar hit but you can’t pay your rent with it.

So we can separate the nominal value of the money (a dollar is a dollar) from the utility of that dollar (can I do the thing I want to do with it, right now?).

Tokenised money. Tokenised money has more utility value than money held hostage in an account in a couple of ways:

  1. Banking when the bank is shut. Depending on the platform on which it is tokenised, it can be moved/paid/reassigned irrespective of if the issuer is online or not. The blockchain platform guarantees the bookkeeping and promises to not allow double spends. This decouples the issuance of the asset from the bookkeeping and service provision, and also means that the holder of the asset is not beholden to a specific bookkeeper to be awake and working when the holder wants to transact.
  2. Atomic transactions and delivery vs payment. This is huge. As more assets become tokenised, transactions can be created that making changes to multiple assets simultaneously. For example, an invoice can be marked as “paid” in the same transaction as the movement of the payment – and both parties can see this simultaneously without further reconciliation. A share can be marked as “ex-dividend” at the same time as a payment made from the issuer to the beneficiary, with no confusion. A bond can be marked as “post-coupon” at the same time as the coupon is paid. A share can transferred in the same transaction as the payment. A bilateral financial derivative can have some event recorded triggered by something else, such that both parties are in do doubt as to the status of it. And so on.

To summarise, tokenised free-flowing money may be more useful and hence more desirable and valuable as an asset, than money held hostage by a specific bookkeeper. When other assets become tokenised on ledgers, this utility value becomes even more pronounced.

Other tokenised assets. Everything that can be represented entirely digitally, and that needs to move across organisational boundaries with guarantees of authenticity and liveness (what is the current state of this?) are most usefully represented as tokens on distributed ledgers. This includes cash and securities but also commercial agreements such as purchase orders and invoices.


Tokenised assets can increase financial services competition

Service provision. Not all banks or custodian provide all or equivalent services. If you want to consume a service that is not offered by your bookkeeper, you need to move your money or assets elsewhere.

Tokenised assets. Because your token is effectively self-custodied (only you have the private key that can generate valid transactions), you can choose your service provider at any time. If you want to do FX, you can select the cheapest FX provider that you have a relationship with, and user their services immediately. This increases competition and financial service providers will need to step up their game. Competition is healthy. With tokenised assets can may be able to select service providers in real time and instruct any of them to perform services on your assets with the click of a button.


Businesses who self-bookkeep can do business at their own speed

Transacting directly. Be removing the bookkeeping function from a specific entity and effectively self-bookkeeping, you can transact at your own pace, when you want, rather than being beholden to the manager of your account-based balance.

This can reduce 3rd party drag and return benefits (speed, cost, operational efficiency) to the real economy.

An economy that can do business at the speed of corporates, without the operational and financial hinderance and friction of cascading chains of 3rd parties, could gain a competitive advantage over those economies who choose not to implement this decentralised financial market infrastructure (dFMI – hat tip to Robert Sams for coining this phrase and Tim Swanson for popularising it).  Specifically what is decentralised?  At the very least, the double spend prevention.  Everything else, such as services, can be competed for in a market environment.



Owners of digital financial assets, especially money, rely on centralised and quasi-monopolistic bookkeepers, usually private entities. The bookkeeper’s incentives (making money from bookkeeping and providing services) are not aligned with those of the customers (being able to do what they want with their assets, including selecting different service providers). Blockchains and distributed ledgers can create decentralised financial market infrastructure and return the bookkeeping, control and management of assets back to the owners.

Traditional custodians of cash and other assets should think about how they might operate in the new world of dFMI. There are plenty of roles for them – decentralised ledgers need to be governed, assets need to be issued, and lifecycle events still need to be managed, though tokenised digital assets may have more automation built into them in the first place.

Jurisdictions who implement decentralised financial market infrastructure could quickly become more competitive than those who don’t, and a small increase in efficiency and commercial attractiveness can, over time, have a positive effect on GDP and lead to large systemic productivity advantages to that jurisdiction.


Can Blockchains Reduce the Impact of Data Breaches?

Another day, another catastrophic data breach.  This time it’s medical records in Singapore, where I live.  At this stage we’re almost immune to this kind of headline:

Cyberattack on Singapore health database steals details of 1.5 million, including Prime Minister (Reuters)

But this is quite bad.  Eileen Yu noted in her piece for ZDNet (my emphasis):

Singapore has suffered its “most serious” data breach, compromising personal data of 1.5 million healthcare patients including that of its Prime Minister Lee Hsien Loong.

The affected users are patients of SingHealth, which is the country’s largest group of healthcare institutions comprising 42 clinical specialties, four public hospitals, five speciality centres, nine polyclinics, as well as three community hospitals.

Non-medical personal details of 1.5 million patients who visited SingHealth’s specialist outpatient clinics and polyclinics between May 1, 2015, and July 4, 2018, had been accessed and copied. The stolen data included patients’ name, national identification number, address, gender, race, and date of birth.

In addition, outpatient medical data of some 160,000 patients were compromised, though, the records were not modified or deleted, said the Ministry of Health and Ministry of Communications and Information (MCI), in a joint statement late-Friday.

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The Basics of Bitcoins and Blockchains

Last December I was approached by a publisher, Mango, who asked me if I would write a book about blockchain technology.  A little nervously, I agreed, and I’m excited to announce the result of six months of effort:

The basics of bitcoins and blockchains - book cover

The Basics of Bitcoins and Blockchains is an essential guide for anyone who needs to learn about cryptocurrencies, ICOs, and business blockchains.  Written in plain English, it provides a balanced and hype-free grounding in the essential concepts behind the revolutionary technology.

I wrote The Basics for an audience of business people, students, practitioners, and those who are simply interested in this technology.  I tried to make it entertaining even for those who are already working in the cryptocurrency or blockchain industry.  For example, did you know:

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Please believe my database

I was reading Matt Levine’s Money stuff today and was struck by a thought. He writes:

“A national customs agency, for instance, might be happier approving shipments on an auditable open blockchain than in the proprietary database of a particular shipping company.”

This is interesting, but I want to take it one step further.  Blockchain or not, a record of events that have been cryptographically digitally signed, with references to previous transactions could be very useful.

If you are a company, and a regulator or agency asks you for your view on what happened, and you give the regulator an Excel spreadsheet or a normal database extract saying “Here’s what happened, I promise”, this is very weak evidence and can be tampered easily by deleting rows, or removing key words like the names of sanctioned countries, etc.

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Frictionless tokens create friction

We’re gonna need another intermediary…

In 2013-15 it was trendy for online merchants to pretend to accept bitcoin as payment. It was a very cheap way to get positive media mentions and seem innovative. Overstock, Dell, Tiger direct… they were all at it after they realised it was all media upside. Even Virgin Galactic accepted bitcoin as payment for trips to space at some point (Note: I think paying for a trip to space with bitcoins is actually quite cool).

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Useful new ICO metrics for 2018

I’ve been at a few events recently where people talk about the “market cap(italisation)” of utility tokens issued in ICOs, and comparing them to the market cap of cryptocurrencies or (even worse) listed companies.  This is truly dreadful and misleading, perhaps sometimes intentionally so.  In this post I introduce two useful metrics for comparing across ICOs: the Reserve ratio, and the Commitment ratio.

For a non-hypey introduction to ICOs please see A gentle introduction to ICOs.

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Bitcoin price, gold, and nonsense – how not to value bitcoins

Important note: If you own more than $1,000 worth of cryptocurrency then you should definitely be using a hardware wallet instead of keeping coins on exchanges.  I recommend a Trezor which you can buy for €89 directly from their website.

Every few days I hear the argument “If x% of the money in gold (or other asset class) moved into bitcoin, a single bitcoin should be worth $y”.  This article explains why this argument is utter nonsense.

The (flawed) reasoning is as follows: the total value of gold in circulation is estimated at US$8 trillion.  If some small fraction of the people holding gold (say, 5%) sold their gold for US Dollars (releasing $400 bn), and the USD proceeds were used to buy bitcoins, the total value of bitcoins (commonly referred to as “market capitalisation”) would increase by that amount of dollars ($400bn), and because we know the total number of bitcoins in circulation, we can derive a price per bitcoin.

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MAS just released Corda for Central Banks… so what?

I’m absolutely thrilled to be able to write about the open sourcing of Project Ubin Phase II, a key project that our team has been working on for the past seven months with the Monetary Authority of Singapore (MAS), ten banks, and our partner Accenture.

Ubin Phase 2 report

What is Project Ubin?  It’s probably the most advanced starter kit out there for anyone wanting to explore blockchains for banking:

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Blockchains and central banks – what have we learnt?

This article was first posted on

Over the past couple of years, R3 has worked closely with a number of central banks to explore if distributed ledgers could support their policy goals, and I have had the privilege to participate in a number of these projects.

What have we learnt?  What is important?  What do central banks care about?  While I can’t speak directly for individual organisations, I have collated my own thoughts, and wanted to share these ahead of the Singapore FinTech Festival this year (13-17 Nov) when the results of Singapore’s “Project Ubin” experiments will be announced.

Update (post FinTech Festival): Read about the Open Sourcing of “Corda for Central Banks“!

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The hype around central banks, digital currencies, and blockchains

Central banks and blockchainThere has been a lot of hype around central banks, interbank payments, blockchains, and central bank digital currencies (CBDCs), but the narrative has become confusing and often misses the point.  What’s going on?  Actually two independent things are being actively explored:

  1. Decentralisation of interbank payment systems
  2. Wider access to digital central bank money (Central Bank Digital Currencies – CBDCs)

I aim to explain them both in this post.

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