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Chapter 1

Introduction

The chief principle of a well-regulated police state is this: That each person shall be at all times and places … recognised as this or that particular person.

Johann Gottlieb Fichte (1796)

What does ‘identity is the new money’ mean? My argument is that the nature of identity is changing. The concept of identity in today’s post-industrial society is profoundly different to the concepts of identity that we are accustomed to, both the bureaucratic notion of identity that emerged from nineteenth- and twentieth-century industrial society and urban anonymity, and the pre-industrial notion of identity that built on extended family and clan. We might call it ‘new identity’ to emphasize its technological nature.

This book argues that not only is identity changing profoundly, but that money is also changing equally profoundly, because of technological change, and that the two trends are converging so all that we will need for transacting will be our identities. The technological change I’m talking about here centres of the evolution of social networks and mobile phones. They will enable the building of an identity infrastructure that can enhance both privacy and security – there is no trade-off.

The long-term consequences of these changes is impossible to predict, partly because how it takes shape will depend on how companies (probably not banks) take advantage of business opportunities to deliver transaction services. But I will predict that cash will soon be wholly redundant – and a good thing too – and there will be a proliferation of new digital currencies.

Rethinking identity

The old concept of identity is broken in the world of the new technologies. Identity is neither singular nor fixed, no matter how administratively convenient it might be to think of it that way. There are really three kinds of identity associated with people: the individual’s own personal or psychological identity, their social identity and their legal identity. Neither individual nor social identities are fixed: they evolve and change over a person’s lifetime; and they should not really be conflated with the legal identity. Legal identities are fixed and are about the identifiability of the individual.1 Online, we have multiple social identities that may be linked directly or indirectly to our legal identity. There are different kinds of mechanisms for validating various types of transaction, and for ensuring security and privacy.

A new understanding of identity is essential and ultimately inevitable, but what that understanding is depends on the complex co-evolution of technology and paradigms. It is very difficult to predict how these will co-evolve for even a few years ahead. Technologists (like myself) tend to overestimate the speed of adoption of new technologies but underestimate the long-term impact on society. In other words, it will take longer than people like me expect for new forms of identity to reshape mass markets, but when they do the impact on society will be far greater than just making it easier to log on to the Daily Telegraph website. Once you begin to look more than a few years ahead, in fact, the social changes wrought by new technology become hard to imagine.

This has always been the case. For example, on 3 April 1988, the Los Angeles Times Magazine published a description of life now. It contained all sorts of bizarre views of life in Los Angeles today, including such unimaginable fantasies as supersonic jet travel and people smoking cigarettes. But it’s a fun read, and in the true spirit of palaeo-futurism, I encourage you not to laugh at what the writers got wrong but to reflect on why they got it wrong. For example, what’s wrong with this picture from the magazine story?

Bill is trying to locate his wife to tell her about the dinner guests. Unable to reach her either at home or the office…

It has been at least a decade since my wife has called me either at home or at the office or, indeed, anywhere else. If she wants to talk to me, she calls me, she doesn’t call a place where I might be. The mobile phone didn’t just change the payphone business, it changed the communications paradigm, the common mental model that we share as the basis for thinking about communications.

Uneven

The Canadian novelist William Gibson, author of the seminal work of fiction for the new economy, the wonderful Neuromancer, and the man who coined the term ‘cyberspace’, famously observed that the ‘future is already here, it’s just unevenly distributed.’

He means that the technologies that will shape society in our lifetimes already exist, it’s just that we might not have noticed them yet. One of the key elements missing from that 1988 vision of 2013 was the mobile phone, despite the fact that it had already existed for a decade. In fact I’m sure that some of the people writing that magazine piece had a mobile phone, but hadn’t realized where mobile phones were going.

I think that the future of identity over the next twenty-five years, in common with the future of a great many other everyday tools, rests on that device formerly known as the mobile phone and what Sam Lessin of Facebook calls the ‘superpower’ of being able to communicate with anyone anywhere in the world at any time. Understanding this is key to shaping and forecasting the identity paradigm that is explored in Chapter 2.

When I heard the futurologist Richard Watson talking about the problem of forecasting across a generation at the Digital Money Forum,2 he said that one of the central problems is that the kind of digital bubbles people are living in lead to a kind of Balkanization of the future. We have to look out of the corner of our eye to see how technology is being used in ways that might disrupt existing business models, and that is difficult. So this leads me to think, in the spirit of William Gibson, that just as the magazine writers didn’t see that the decade-old technology of mobile phones would change the communications paradigm, that there must be a decade-old technology that is going to be pervasive in fifteen years’ time, leading not just to disruption in old businesses and the creation of new ones but to a fundamental shift in mental models.

So what is it?

Social identity the new paradigm

I think the answer is social identity. I specifically do not say social media. Yes, social media are an incredible new technology. Yes, we can use them for all sorts of exciting new purposes. But it’s what they are doing to identity that will be disruptive in business, commerce and government. Facebook, LinkedIn, Twitter, Tumblr and all of the others are already demonstrating just how our identity paradigm is changing. Identity is returning to a concept built on networks, rather than index cards in a filing cabinet. In common with a great many other people, a couple of billion, I use these networks almost daily. In a relatively short time, these tools have transformed society and will continue to transform it, as discussed in Chapter 3, in ways that are hard to imagine right now.

We already use these social networking identities, albeit in fairly primitive ways, to log in and browse around on the web. We could find ourselves using them for ‘serious’ business pretty soon. Why shouldn’t I be able to log in to the Benefits Agency using my Facebook identity? This might be very convenient for me and it might be also be very convenient for the Benefits Agency, but right now the Benefits Agency couldn’t really be sure it was me, because they’ve got no way of identifying the ‘legal me’ online, and neither have Facebook.

That is changing as identification and authentication technologies continue to develop. Suppose these social identities were made a little more secure. We can begin to imagine how more sophisticated and secure forms of identity might begin to change this equation. Perhaps I use my bank account to log in to Facebook, so now Facebook can be sure I really am ‘Dave Birch’. Then I can use my Facebook account to log in and sign on for unemployment benefit. This would take us into a different kind of online world, a different online experience where privacy becomes an active, rather than passive, part of life.

New money

The second area of profound technology-driven change I want to discuss is money. In order to further explore ‘identity is the new money’, we will have to explore what ‘money’ means. One of the problems in discussing money is that this simple English word means several different things to economists and technologists – in the classic definition it is a unit of account, a store of value and a medium of exchange. I want to focus here on money as a generalized means of exchange between buyer and seller to enable transactions, and on money as the subset of the means of exchange that does not involve credit, or in other words, cash. Identity changes the requirements for, and use of, both kinds of money, both the pounds or euros that denominate all transactions and the transactions that still use the physical notes and coins themselves.

That LA Times vision of 2013 had one of the protagonists go to an ATM and draw out $20 bills. When I travelled to Austin, Texas, for the South-by-Southwest interactive festival in 2013, I didn’t take any US currency with me nor did I get any bills out of an ATM while I was there. I paid for everything using cards and my mobile phone. In other words, I paid using my identity.

Time for change

This, and similar experiences, show that signs of change are already starting to be detectable. Contactless cards and mobile phones, Bitcoin and Isis, Amazon gift certificates and World of Warcraft Gold – we have the technology, as they say, and in Chapter 4 I look at the ways that it is changing money and explore the reasons why things are changing now.

The technology enables change, of course, but it isn’t by itself the trigger for the shift that is coming, which will involve not only the widespread use of completely new mechanisms for exchange beyond debit cards and PayPal, but also new stores of value. We’ve seen a great deal of innovation to date but it hasn’t yet reached the core, the institutions and, yes, the paradigms of money.

Innovations in payment technology must not be confused with the basic construction of a monetary system.3 Ours is actually a relatively recent invention. It is barely forty, and having something of a mid-life crisis. When Richard Nixon ended the convertibility of the US dollar into gold in 1971, we entered a new world of fiat currency. From that day on, dollars have been backed by the full faith and credit of the United States and nothing more. All the world’s currencies are now ‘pure manifestations of sovereignty conjured by governments’.4 That’s why the talk of ‘virtual currency’ is misplaced: all currency is virtual.

More than a decade ago, Michael Klein, then Chief Economist of the Royal Dutch/Shell group of companies, said that monetary regimes have changed around once per generation.5 They aren’t going to stop now. It is time for another regime change.

We’ve been here several times before. Around four hundred years ago, things were going horribly wrong with money in England. If you had asked people about the future of money at that time, they would have imagined better quality coins. What in fact happened was revolution and a new paradigm. A generation later Britain had a central bank, paper money – although the smallest banknote, five pounds, was worth a month’s pay for a professional6 – as well as a gold standard, current accounts and overdrafts.

We are at a similar point now, with a mismatch between the mentality and the institutions of paper money in the industrial age and a new, post-industrial economy with a different technological basis for money. In a generation or so, there will be a completely new set of monetary arrangements in place. Just as the machine-made, uniform, mechanized coinage introduced by Isaac Newton in 1696 better matched the commerce of the industrial revolution, so we can expect some form of digital money will better match the commerce of the information age.7

Reputation and retail

So what will link changing identities with changing money as these trends converge? In a word, trust. In a world based on trust, it will be reputation rather than regulation that will animate trust in economic exchange.8 The ‘social graph’, the network of our social identities, will be the nexus of commerce, administration and interaction.

In our distant past we were just as defined by our social graph as we are now.9 There were no identity cards or credit reference agencies or transactional histories of any kind. In the absence of such credentials, you were your reputation. Of course, managing and maintaining reputations among a small social group of an extended family or a clan was not a scalable solution as civilization progressed and moved on to growing trade as the source of prosperity. In the interconnected future, however, there is every reason to suspect that the social graph will resume its pre-eminent position since, as I will explore, it is the most trustworthy, reliable aspect of a persona. This is where the link with money begins to take shape. As the anthropologist Jack Weatherford wrote10:

The electronic money world looks much more like the neolithic world economy before the invention of money than it looks like the market as we have known it in the past few hundred years.

Far-fetched? I do not think so. In 1696, there was no cash in England with the result that ‘no trade is managed but by trust’.6 With trust, you don’t need cash. A wonderful example of this can be found in the three long strikes that shut down the retail banks in Ireland for months at a time between 1966 and 1976 (see Case Study: Ireland without Money). The economy did not collapse in the absence of cash (which soon ran out), as personal cheques and IOUs provided the circulating means of exchange. There were, at the time, some 12,000 retail shops and (perhaps more importantly) some 11,000 public houses that provided transaction services. Antoin Murphy’s seminal work on this reports:11

It appears that the managers of these retail outlets and public houses had a high degree of information about their customers – one does not after all serve drink to someone for years without discovering something of his liquid resources.

Identities and credentials are easy to create and destroy. Reputations are much harder to subvert since they depend not on what anyone thinks, but on what everyone thinks. Reputations are a sound basis for interaction. People make judgements based on other people’s reputations, and behave better out of concern for their own.12 There would have been precious little chance of pretending to be someone else at the local pub in Ireland in the 1970s and as a consequence the social graph was able to provide the necessary infrastructure: the landlord knew whose IOUs were good and whose were not.

What does a modern society based on these reputations look like? I can make an informed projection in one particular area. When it comes to commerce, reputation replaces money.

Identity implications

At the dawn of the Internet age, the Nobel prize–winning economist Paul Krugman wrote that:10

There will be a distinction between electronic cash and electronic money because of the need for small transactions where neither the buyer nor seller want [sic] the buyer’s creditworthiness to be an issue.

This apparently common-sense distinction will vanish, which takes us to Chapter 5 of the book. If we suppose that some form of identity infrastructure comes into existence and reputation becomes the basis for transactions, then what might the implications be? It might be fun to focus on the ­Tomorrow’s World gee whiz of Google glasses, but for this book I have chosen to focus on the very specific issue of electronic money for a few reasons.

Firstly, because almost all money is already electronic. In the UK, the notes and coins in circulation are a mere 4.5% of the broad money supply. New technology makes it possible to get rid of money’s mundane rump.

Secondly, because losing that rump has economic implications (the existence of cash means a zero floor on interest rates and that restricts options for managing the economy), business implications (in reducing costs and reshaping retailing) and social implications (because the costs of cash fall disproportionately on the poor while the benefits mainly accrue to criminals of various sorts).

Finally, because it’s fun. Everyone uses cash without really thinking about it, so picking on cash as a way of exploring the impact of new ways of thinking about identity is practical, understandable and (I so desperately hope) entertaining for the non-specialist.

With an effective identity infrastructure in place, there will be no need for a single medium of exchange, no need for fiat currency. If you know all of the counterparties to a transaction, and can establish their ‘credit’, then there is no need for cash. Identity substitutes for cash: when I go into Waitrose and pay with my John Lewis MasterCard, it’s an identity transaction. The terminal in Waitrose establishes that I have access to a line of credit that means that Waitrose will be paid. No actual money moves between my card and the Waitrose till. On the other hand, when I buy an apple from a market stall and pay for it with a pound coin, the stallholder doesn’t need to waste any time or money trying to establish who I am, because he doesn’t need to trust me. He just needs to trust the pound coin, which he self-assays. It’s not that there are no counterfeit pound coins, because there are, but that there are too few of them to disrupt commerce (and, to be honest, if you give the smallholder a counterfeit coin and he later detects the fraud, he will probably just palm it off onto someone else).

When managing reputation is efficient and implicit, the pound coin becomes uneconomic and so does everything that goes with it: the cash register, the ATM, the security guards. If you don’t need cash registers and ATMs, then the costs and complexity associated with handling currencies collapse. If it becomes my mobile phone talking to the chap at the market stall’s mobile phone, then there’s no reason to restrict our commerce to sterling, or euros, or, for that matter, any fiat currency. We can use Bitcoins or Microsoft Money. We can use kilowatt hours or Brixton Pounds. We can use gold-backed e-Dinars or trade-backed barter currencies. We can use Dave’s Dollars.

If you don’t like their money, you can start your own. If the identity and authentication infrastructure is in place, it will be easy. Focusing on money, then, I think I can say that the impact of the new identity will be profound: so profound, in fact, that identity will be the new money.

Implications

So I argue here that identity becomes the key to transactions and a crucial individual resource that needs to be looked after by responsible organizations. We all need to start planning for the transition to identity-based transactions.

There is the social impact to be considered. We need to find a way for the infrastructure to deliver privacy and security to individuals and organizations. There should be no further discussion of the ‘balancing’ of privacy and security as if there is an unavoidable trade-off between them. We need both.

The business impact will be, inevitably, creative destruction at the heart of capitalism. New businesses, and new business models, will spring up to use the new technology and the new social graph.

Finally, the technological impact will shape the trajectory of new products and services. If there is some form of utility identity infrastructure that, as I hope, delivers both privacy and security to people, devices and organizations, then it should be standardized and accessible for open, transparent and non-discriminatory use.

This book ends by considering these impacts, and making three practical and positive suggestions for policymakers.