The Evolution of Money – Part 3

Currently, government money (e.g., USD, ZAR, GBP) can only be held in two forms: physical cash (physical bearer instrument) or digital money in a bank account (digital registered instrument). Crypto currency is a new form of money that can be offered as a third form of central bank issued money. It is only a matter of time before central banks issue their own crypto instruments in the form of central bank issued crypto currencies (CBCCs).

(This is a continuation of my earlier blogs “The Evolution of Money – Part 1 ” and “Part 2 ”)

Currently, government money (e.g., USD, ZAR, GBP) can only be held in two forms: physical cash (physical bearer instrument) or digital money in a bank account (digital registered instrument). Crypto currency is a new form of money that can be offered as a third form of central bank issued money. It is only a matter of time before central banks issue their own crypto instruments in the form of central bank issued crypto currencies (CBCCs).

While the term CBCC may scare some in the regulated space as “crypto currencies” have become associated with unregulated tokens of value, the term merely differentiates it from the digital money that sits on commercial banks’ balance sheets as liabilities. Its name is derived from the cryptography that allows it to be a crypto instrument.

Just as no distinction is made between the value of a physical $100 bill and $100 in digital money that appears in an online bank account, so too would the value of $100 in CBCC be the same as the first two forms of money. The currency would remain the same. Only the form would change. The emergence of CBCC would not change the money supply[i] in an economy.

The introduction of a third form of regulated money, CBCC, would replace another form of money to keep the money supply constant ceteris paribus. Just as one deposits a $50 note at the bank which gets replaced by $50 in an online bank account, so too would $50 in CBCC have to replace some other form of money already in circulation. A central bank could easily set up a trust account to receive digital money (which it could take out of circulation) and issue a corresponding amount of CBCC to be sent to a wallet address of the digital money sender. In this way, the form of money as we know it could migrate from digital money to CBCC.

By migrating the predominant form of money in an economy to CBCC on a sovereign blockchain (a shared ledger under the jurisdiction of a central bank), a central bank could observe real time transactions in an economy to better understand the velocity of money and gauge the health of the economy on a daily or even hourly basis. Once a sovereign blockchain is created with a CBCC, other financial instruments such as bonds, equities, derivatives and even land and car registries could migrate to the same sovereign blockchain. This would allow the central bank to conceivably see the creation of all commercial bank assets in an economy in real-time, including the categorisation of those assets (e.g., collateralised loans vs. unsecured loans). Such transparency is invaluable to any central bank and would make decision-making more informed, timely and effective.

With a view of all transactions in an economy, anti-money laundering initiatives would be greatly enhanced. As it stands, payments from customers at a single bank are not always seen by the regulator as they are updates to that particular bank’s ledger and do not get processed through a national payments system, making the historical flow of money difficult to track. In contrast, a sovereign blockchain would allow the movement of money to be traced through a historical path of transactions on a single decentralised ledger.

Tax collection could be revolutionised through the use of smart contracts on a blockchain. Tax could be collected at the point of transaction in real time, changing the entire system of tax collection from “after-the-fact collection” to “in-the-moment payment”. Imagine every payment to a retailer being automatically split at the time of payment so that 10% (a sales tax for example) would be paid directly to a government address with no inconvenience or cost to the customer or merchant. This would significantly reduce the burden and cost of tax compliance for the merchant (as they would be paying their taxes automatically throughout the year) and improve collections for the tax authority.

This is just one example of how tax could be streamlined, but other examples abound – automated Capital Gains Tax when a vanilla asset is sold (the blockchain would have the history of what the asset was initially bought for and a smart contract could calculate the tax owed and pay both the seller and the tax authority in a single transaction); automated transfer duty on property sales; automated income tax payments when salaries are paid etc. The very notion of a withholding tax could become obsolete.

The blockchain would also allow the “codification of money”. Imagine a world in which the money paid into the account of the Department of Education could only be disbursed to accounts associated with schools or where money sitting in the government’s social grant account could only be paid to accounts of individuals flagged as eligible to receive those grants. The combination of the codification of money and the transparency that the blockchain allows would go a long way in combatting corruption.

[i] Money supply is defined as the total amount of monetary assets in an economy’s currency, the summation of physical notes and coins as well as digital money (the nuances of narrow and broad money definitions of M0, M1, M2 and M3 are not pertinent to the point at hand).

by Farzam Ehsani

Proliferation of cryptocurrencies: which currencies should you invest in?

Most people in the banking world today are familiar with the term blockchain. The first thing that springs to mind when blockchain is mentioned is Bitcoin. It is the cryptocurrency and digital payment system created by the mysterious Satoshi Nakamoto, which has grown exponentially since its inception in 2009.

Most people in the banking world today are familiar with the term blockchain. The first thing that springs to mind when blockchain is mentioned is Bitcoin. It is the cryptocurrency and digital payment system created by the mysterious Satoshi Nakamoto, which has grown exponentially since its inception in 2009.

The value of Bitcoin has grown from around USD 2/Bitcoin in December 2011 to above USD 2,300/Bitcoin this year. Investment in Bitcoin sky-rocketed after a surge in traded volumes and increased Bitcoin prices in the Asian Market.

Investors are opening up Bitcoin wallets in the fear of missing out. As investors rush to ride the wave, not only has investment in Bitcoin spiked, but so too has the investment in “altcoins” (the cryptocurrency alternatives to Bitcoin). Some of the largest and most dominant of these are, inter alia, Litecoin, Ethereum, Ripple and Monero. Each cryptocurrency offers something different, and if deciding to invest in these long-term, it would only be prudent to understand more about what they do.

Let’s start with the world’s leading cryptocurrency, Bitcoin. In addition to boosting financial inclusion, Bitcoin aims to make near real-time cross-border transactions possible on a global scale. In South Africa there are already online merchants that are accepting Bitcoin payments. Some of them are well known brands: BidorBuy, Takealot, Superbalist, Runwaysale, Raru and Appliance Online. Additionally, all merchants on the platform (30 000 websites), accept Bitcoin.

Ethereum differs slightly from Bitcoin, with more focus on technical blockchain development. It is an open source platform used to build decentralised applications. Examples of Ethereum applications include self-executing smart contracts and native tokens. A number of interesting developments on the Ethereum blockchain are emerging. WeiFund, a crowdfunding solution, operates similarly to conventional crowdfunding platforms such as GoFundMe and Kickstarter. However, instead of using fiat currency, WeiFund raises funds using the Ether cryptocurrency. Users can contribute and manage crowdfunding campaigns with the use of smart contracts to turn donations into complex agreements.

Litecoin was created by Charles Lee, a former engineer at Google, with the intention of becoming the second most valuable cryptocurrency. When it was written, it was the second biggest cryptocurrency by market capitalization, but has since fallen to the 6th largest as it has yet to see much more investment. Litecoin is similar to the Bitcoin. The main difference is that it takes an average of two and a half minutes to generate a block, contrast to an average of ten minutes that Bitcoin takes to generate a block. This means that Litecoin can confirm transactions at a faster speed than Bitcoin. However, it is important to note that transactions occur instantly, whilst confirmation of transactions occur as the blockchain propagates.

Monero is attempting to take on Bitcoin by providing greater transaction anonymity. Bitcoin is known for supporting anonymous transactions; however, each transaction has a sender, receiver and amount recorded on the blockchain. Each wallet has an address which can be traced back to the owner through IP addresses and service providers. To combat this, Monero makes use of a ring signature to provide for more privacy.

Ripple’s digital currency XRP is similar to Bitcoin as they are both digital currencies that can be mined and sent from peer-to-peer without an intermediary. Ripple is used as a currency agnostic value exchange. It is a real-time gross settlement system enabling real-time global payments anywhere in the world. The advantage of this is that it can be in any form of currency (Dollars, Yen, Euros, etc.). Ripple enables secure, instant and inexpensive global financial transactions and may assist Bitcoin in accessing the rest of the financial world.

There are over 700 different cryptocurrencies currently in issue which opens up a broad investment base. Hopefully some of these points spark your interest to delve deeper into each cryptocurrency’s ambition and that the summary above has given you a starting point for further research.

by Matthew Shaw

The Evolution of Money – Part 2

The emergence of crypto instruments has allowed digital monetary value to be held without the need for a trusted intermediary for the first time in history. Crypto currencies – the most common type of crypto instrument today – such as Bitcoin, Ether, and many others demonstrate this fact.

(This is a continuation of my earlier blog: The Evolution of Money – Part 1)

The emergence of crypto instruments has allowed digital monetary value to be held without the need for a trusted intermediary for the first time in history. Crypto currencies – the most common type of crypto instrument today – such as Bitcoin, Ether, and many others demonstrate this fact. Anyone who owns crypto currency has a unique private key (akin to a password) that allows the owner (and only the owner) to mathematically “unlock” or spend the value at an associated public address (akin to an account number). The ledger that records the amount of crypto currency at any particular public address is maintained by a network of computers (called nodes) that run a consensus algorithm to ensure that they are all synchronised.

The ingenuity of this network of nodes working together to validate transactions (and reject any double-spending) is that the multitude of nodes ensures that there is no dependence on any single one to ensure the integrity of the ledger. This is a powerful concept – the way to remove a trusted intermediary is not to get rid of the intermediary, but to increase the number of intermediaries that are maintaining the same ledger so that trust in any particular intermediary is no longer needed. Dependence on any single intermediary reduces as the network grows, and indeed the term “intermediary” starts to become inappropriate and even inaccurate.

To understand the financial world’s fascination with crypto currency and blockchain, we have to examine the nature of money. The traditional textbook definition of money refers to its three major functions in society: a means of exchange; a unit of account; and a store of value. Interrogating this further, however, it becomes apparent that all three functions relate to the concept of money representing value. After all, why accept money as a means of exchange for something else of value unless one believes the money has at least the value of what it was traded for? And a unit of account that measures the value of other products needs to possess value itself, otherwise it would be abandoned as a unit of account (as we have seen in any economy that has witnessed hyperinflation). So if the functions of money boil down to the value it possesses, what determines the value of money?

Six characteristics determine how effectively money performs the functions mentioned above and in turn determine its value. These characteristics are:

  1. Durability – if money is meant to store value and does not last long itself, it cannot function as a very good store of value;
  2. Portability – to facilitate trade, money needs to be very portable, and costs associated with transferring it from one party to another diminish its function as money;
  3. Fungibility – a unit of money should be exactly the same as any other unit, otherwise time and energy would be consumed in comparing tokens rather than promoting trade;
  4. Divisibility – the smallest unit of money must be worth less than every other tradable asset, otherwise another token of money would need to be used to trade something worth less than the smallest unit of money;
  5. Scarcity – the oversupply of any commodity brings its value down, and in the extreme case, where something is overly abundant, it cannot be used to trade for other scarce resources; and
  6. Acceptability – money is accepted because the recipient believes it will be accepted by others when he/she wants to spend it. Without the belief that money will be accepted by others in the future, it would cease to be money.

Crypto currency is a better performing form of money (versus physical cash and digital money) in two significant ways: (1) It is more durable (it’s backed up by many more servers across institutions than traditional digital money that is backed up only by the servers of an individual bank); and (2) it is more portable (as it is more seamless to move money on a single decentralised ledger than across different centralised ledgers). Money is supposed to be the most frictionless asset in society, and crypto currency is the most frictionless form of money to date.

The Evolution of Money – Part 3 coming soon!

by Farzam Ehsani








Blockchain in Finance: From Buzzword to Watchword in 2016

In this feature, Farzam Ehsani looks back at the evolution of blockchain development – and nomenclature – in the finance space over the course of 2016. Further, he anticipates the introduction of central bank-issued cryptocurrencies that will truly usher in the age of the blockchain.

If 2015 was the year when many first heard about blockchain, 2016 was the year when many pretended to understand what it was – it was just too embarrassing to admit ignorance of a term that had become such a buzzword.

After all, everyone else seemed to know what it was. “It’s a distributed ledger!” became the battle cry to fend off those that came close to uncovering our lack of understanding.

Yet, the truth is that we’re all learning. Whether it is figuring out what a “node” is or understanding the intricacies of homomorphic encryption and zk-SNARKs, we are all witnessing the unfoldment of this beautiful technology and its implications for the world.

I like to compare blockchain to an extraordinary vehicle that we’ve heard can travel from Cape Town to Cairo in a matter of seconds.

As news spreads of the discovery of this amazing vehicle, more and more people imagine new possibilities, and announcements proliferate: the vehicle will be used to transport maize, coal, sunflowers and more. But when asked what this vehicle looks like – whether it has wings or wheels, belts or brakes – few can offer satisfactory answers.

Such has been the state of blockchain in 2016: a magnificent technology has been discovered, and numerous use cases abound, however, much work needs to be done to better understand and build the underlying platform or “vehicle”.

Protocol growth

While we fell in love with bitcoin and the genius of Satoshi, we also realized that the bitcoin vehicle wasn’t designed for all terrains.

The financial services industry requires a multi-asset platform which is not what bitcoin was designed for. Furthermore, in a regulated environment, actors are known to one another and a breach of trust has punitive consequences. As such, a consensus algorithm such as proof-of-work, intended for trustless participants, serves little purpose except to increase costs and transaction times in a permissioned network.

With this recognition, 2016 saw the emergence of several open-source platforms for the financial services industry, from Hyperledger to Chain Core to Corda (adding to other open-source platforms such as ethereum and Monax released in previous years).

Several more platforms exist in the proprietary space, and many of these will head into open-source territory in 2017. I believe their proprietors will come to acknowledge that any chance of long-term success at the protocol level lies in the network effect, which is hindered by any attempts of monetization.

After all, no one makes money from TCP/IP or HTTP.

Use case among use cases

As vehicle designs (permissioned blockchain protocols) emerged this year, the proclamation of use cases grew louder. One use case in particular will allow all others to reach their highest potential: money.

Moving the most common asset in our economies – fiat currency – onto a blockchain is currently the most significant use case of all. This is because nearly all transactions in our economies involve two parts, one of which is virtually always money.

Money is the lubricant of our economies and its value is in being the most frictionless asset of all (currently, it is not). Unregulated cryptocurrencies have outperformed fiat currency in this regard and the financial world has woken up to this.

Central banks from Canada to China, England to Europe, Sweden to Singapore, USA to the RSA, and many more, are researching, testing, or actively pursuing the establishment of a central bank issued cryptocurrency* (CBCC).

The issuance of CBCC on a sovereign blockchain will allow other financial instruments such as bonds, equities, derivatives, and even land and car registries, to be migrated to the same blockchain and permit a plethora of use cases to come to full fruition.

Without CBCC on a sovereign blockchain, most use cases are stymied. For example, reducing the settlement time of equities to zero isn’t very helpful if the money used to buy those equities still takes a day or two to settle.

Catalyst for the future

The issuance of CBCC on a sovereign blockchain would not only catalyse other use cases, it would also transform the very nature of the banking industry itself.

In the paper “The Advent of Crypto Banking”, I describe a future in which banks might not be deposit-taking institutions, in which bank runs could not exist, and in which banking systems could be more stable and inclusive. The case for fiat currency on a blockchain is indisputable for central banks and regulators.

As we move into 2017, we will see the transformation of blockchain from a buzzword to a watchword. We will see the custodians of our fiat currencies, central banks, move closer to harnessing the power of blockchain technology for the benefit of entire economies.

The amazing blockchain vehicle that once only existed in Satoshi’s imagination will soon benefit the lives of all. Humanity awaits.

*I intentionally use the word “crypto” and not “digital” as central bank-issued digital currency has existed for several decades already.

by Farzam Ehsani


Farzam Ehsani is the leader of the Blockchain Initiative for the FirstRand Group (Africa’s largest bank by market cap).

This piece was originally published on on 20 December 2016 here


The Evolution of Money – Part 1:

Any monetary value in our society exists in one of two ways: bearer instruments or registered instruments. A bearer instrument is an asset that is assumed to be owned by the holder of the instrument for which no transaction record is kept.


Any monetary value in our society exists in one of two ways: bearer instruments or registered instruments.  A bearer instrument is an asset that is assumed to be owned by the holder of the instrument for which no transaction record is kept.  An example is physical cash.  You do not need to prove to anyone that the physical cash in your wallet is yours.  You have it and so you are the presumed owner.  Society keeps no record of who previously had the $20 dollar bill that now sits in your wallet.  Registered instruments, on the other hand, are assets whose ownership is determined by referencing a ledger managed by a trusted institution (e.g., properties at the Deeds Office, bonds and equities at the Central Securities Depository, or digital money in a bank account).  While all assets can be categorised as either bearer or registered instruments, assets can also be categorised as either physical or digital assets.  Overlaying asset form (i.e., physical vs. digital) onto instrument type (i.e., bearer vs. registered) helps us understand the evolution of monetary instruments in our society.

Figure 1: The evolution of monetary instruments in society


Physical bearer instruments were the first monetary instruments of humanity (e.g., animal hides, shells, salt, etc.), but communities came to realise that such forms of monetary value had their limitations.  Land, for example, would be a disastrous bearer instrument.  If you left your land to hunt, and came back to find someone else standing on your land claiming it as theirs, one of two outcomes could result:  The loss of the land to the new “owner”; or violence to resolve the dispute.  Furthermore, there would be an incentive to remain on your land to maintain ownership and avoid any potential disputes.  None of these outcomes is conducive to an advancing civilisation.  So as communities came together, physical registered instruments emerged where the community collectively agreed on a trusted intermediary to keep the record of ownership (the source of truth) of a particular asset and update it on the community’s behalf.

As computers became more widely adopted, many of these physical registered instruments migrated from physical to digital registers.  The birth of digital registers also gave rise to digital registered instruments – instruments that have no physical form, and are defined purely by an entry onto a digital register (e.g., a government bond or money in a bank account).  Physical forms of value are easy to understand in this framework.  Digital instruments are less intuitive.

A purely digital bearer instrument (e.g., a digital coin) cannot function as a monetary instrument due to the double-spending problem.  Think of a photograph on your smartphone.  Sending this photograph to someone else does not delete it from your phone – you retain a copy.  This poses a problem for anything digital that is meant to represent value.  What is critically important in any monetary system is that when someone spends their money, they no longer have it.  The ability to copy and paste the digital coin ID mentioned above ad infinitum – the ability to double-spend it – reduces its scarcity and ultimately debases its value.  To avoid double-spending of digital monetary instruments, society has established trusted institutions (such as banks, deeds offices, CSDs) that ensure that when someone receives digital value, someone else must by definition no longer have it.  This is a fundamental principle of our double-entry accounting system where every debit must be equal to a corresponding credit.

In summary, three types of monetary instruments have been described:

  • Physical bearer instrument;
  • Physical registered instrument; and
  • Digital registered instrument.

These three instrument types were the only ones available to humanity until 2009.  That year, Satoshi Nakamoto’s seminal paper “Bitcoin: a peer-to-peer electronic cash system” combined advances in computer science, cryptography and game theory to develop what has now become known as blockchain technology.  This technology has allowed the emergence of a fourth type of monetary instrument:

  • Crypto instrument

The crypto instrument is a digital hybrid instrument with characteristics of both bearer and registered instruments.  It’s like a bearer instrument because the holder of a digital private key is the presumed owner of the value it controls, and a registered instrument because that value is recorded on a ledger (albeit a distributed one).  The presence of both bearer and registered instrument characteristics are necessary for the existence of a crypto instrument.  All assets issued onto a blockchain are crypto instruments.

The Evolution of Money – Part 2 coming soon!

by Farzam Ehsani

Why did we choose Ethereum?

We’ve always said “You can’t spring a blockchain on anyone”. Blockchains by their nature are more secure, more reliable and therefore more useful as more nodes connect to them.


As a banking consortium why did we choose Ethereum over other blockchains?
We’ve always said “You can’t spring a blockchain on anyone”.  Blockchains by their nature are more secure, more reliable and therefore more useful as more nodes connect to them.
In the consortium space, the same is true.  You can’t build a blockchain on your own.  As financial institutions in South Africa, we came together several months ago to start working on a blockchain that we could all use to test concepts, experiment with technology and understand the implications of working across a number of institutions on a distributed shared ledger.

The first question we had to ask ourselves was “What blockchain do we use?”  This is not a trivial question.  There are a number of options that we looked at.  We used various questions to build a filter through which we examined the blockchains on offer.

Is this a “free to use” (i.e. open source) product?

While we as banks generally don’t use open source products and look for licensed products because of the support, quality etc that is included with those products, this project was different:

  1. We were not looking to build a production system, we were looking to pilot a number of concepts.
  2. The licensing costs become prohibitive as the number of institutions wanting to get involved increased.
  3. This is such a new technology that we felt that paying for a product that was still being developed was not ideal.

This ruled out a number of solutions that were technically sound but either had prohibitive licensing costs and/or limited access to the source code.

Can this be used for banking transactions?

While bitcoin is the biggest blockchain network out there, the bitcoin protocol is not designed for banking transactions.  The bitcoin network works brilliantly for bitcoins.  It is a single asset blockchain and does payments extremely well.  The problem is that the majority of banking transactions involve more than one asset.

  • Bank 1 purchases a bond from Bank 2 for x million.
  • Bank 1 places a Treasury Bill with the Central bank on repo for 1 week and then settles with interest on maturity of that repo agreement.
  • So we ruled out a few blockchain solutions where there was limited support for contracts and/or no multi-asset features.
  • Blockchains like MultiChain, while they are simple to use, did not have contract support.
  • There was an option to look at Counterparty style assets on the bitcoin blockchain, or use coloured coins, but these were not ideal solutions and there is limited smart contract support.
  • We needed a blockchain that supported contracts and multiple asset types.

Are there development tools that support the blockchain?

While there are many blockchains out there, not many have a mature set of development tools to support them.  As a developer, building on top of blockchain, you still need to be able to:

  • Create code (contract code in the case of blockchains).
  • Test that code.
  • Put the code into source control.
  • Deploy the code (core blockchain code as well as contract code) into a test environment.
  • Deploy the code into a production environment.
  • Monitor the blockchain and monitor the contracts running on the blockchain.
  • Most blockchains are still new (the bitcoin blockchain has only been running since 2009 and it is the oldest blockchain out there).  The tools supporting those blockchains are even newer and in many cases are non-existent.

Is there a community around the technology?

This was probably the most important question we asked.  Because of the network effect of blockchains, the more people working on a blockchain, the more other people will want to work on that blockchain.

Many blockchains listed on coinmarketcap for example have small teams working on the technology.  Some of the bigger cryptocurrencies have larger teams (bitcoin and litecoin for example).

The one community that has really exploded in the last year is the Ethereum community.  It is also an extremely diverse community.

The Ethereum foundation is focused on the core technology.  There are multiple teams working on multiple client implementations (Geth, Parity, CPP etc).    There are language experts working on JIT compilers and interpreters.  Dr Greg Colvin for example has been working for years on various compilers and is now involved in fine tuning the Ethereum Virtual Machine (EVM) interpreter

Companies like ConsenSys, Monax Industries (Eris) and IPFS are working on applications based on Ethereum.

Banks and banking consortia are using the platform and contributing back to the platform.

The community is vast, specialised and growing and was one of the main reasons why we decided to put Ethereum at the top of our list.


While this technology is still very new, the landscape is already starting to take shape.  In our view, Ethereum ticks all the boxes when it comes to a blockchain technology that can easily be used by a banking consortium.

  • It is free to use (with full access to the source code)
  • It supports multiple assets
  • It supports contracts
  • It has a great set of tools
  • It has a vast and growing community developing around it

by Peter Munnings