ChainZy – Anchoring Mutual Distributed Ledgers (aka blockchains) In Reality

Over the Last year there was a lot of hype about mutual distributed ledgers (MDLs, aka blockchain technology).  Leaving aside the coin-based systems of Bitcoin, Ripple, and Ethereum, I think Z/Yen’s practical work in the field is fascinating.  Much of Z/Yen’s work was featured in the FT recently.

We have been working with mutual distributed ledger (MDL) technologies since 1995 for complex multi-party transactions, but until recently financial services people dismissed MDLs as too complex and insecure, until Bitcoin terrified them.  The mania around cryptocurrencies has led to a reappraisal of their potential.  Equally, MDLs are getting easier to implement and manage at a time when people are rethinking the future of financial services.

Z/Yen have a lot of work  on, a project with SWIFT on The Impact and Potential of Blockchain on the Securities Transaction Lifecycle, ‘proof of concept’ and ‘use case’ demonstrators for clients, courses, and ongoing research.  Z/Yen and Long Finance share their research widely, e.g.:

EY Front Cover

Sharing Ledgers For Sharing Economies: An Exploration Of Mutual Distributed Ledgers (aka blockchain technology) Michael Mainelli and Mike Smith 2015
Journal of Financial Perspectives, Volume 3, Number 3, EY Global Financial Services Institute (December 2015), 44 pages.

Z/Yen published the work of one significant 2015 research consortium (InterChainZ) online back in September.  InterChainZ has been working for the past year on multiple MDLs working together.  Z/Yen used their suite of MDL technologies built up over two decades, dubbed ChainZy, to build a set of seven ‘use cases’ working together.  InterChainZ aimed to answer a core question – “what elements of a trusted third party are displaced by mutual distributed ledger (MDL) technology?” by providing a basic demonstrator of MDLs, including variants of blockchains, and comparing how they might work within selected financial services use cases.  InterChainZ provides a generic demonstration suite ChainZy Logo of software providing an interface to MDLs for tasks such as:

  • selection & storage of documents;
  • document encryption;
  • sharing keys;
  • viewing the MDL transactions;
  • viewing the MDL contents subject to encryption structures.

The software permitted the testing of a variety of MDL technical configurations. It was then employed to discuss and test various practical applications of MDLs.  The outputs were shared with participants as joint intellectual property for their own future use.

InterChainZ has shared some learning online. This includes the above video – titled “Boring is Brilliant” – where participants (DueDil, PwC, and SunCorp) explain what mutual distributed ledgers are, and how they could be employed.   A few of the key learning points from InterChainZ were:

Terminology: Early in the InterChainZ project it became apparent that the further discussion moved away from Bitcoins and blockchains, the easier conversations became.  Bitcoins and blockchains were burdened with too much baggage.  Terminology is evolving rapidly, hence the team’s emphasis on “mutual distributed ledgers” as the term of choice.  The technical focus might be on boring ‘ledgers’, but the excitement is in the applications above.

Identity: It also became clear that ‘identity’ issues are universal.  One of the great advantages of doing consortium research was that the identity chains were both ‘use cases’ and essential infrastructure that would have had to be built for anything else of substance.  Distinguishing ‘identity’ from ‘transactions’ and ‘content’ made processing and distribution sense, at the expense of a bit more complexity in comprehension.  While InterChainZ showed that MDLs can work together, and the project explored many different architecture possibilities, what was explored is certainly only a small portion of what is possible.

Architecture Choices: MDL architecture has to reflect the economic and commercial realities of numerous businesses working together.  This dictates that many different architectures are needed for many different situations.  One ‘blockchain’ will not suffice for most business-to-business work.  Different business uses require different node structures.  For example, the Master node architecture would be appropriate where a regulator is confirming all transactions in a market as being from valid market participants.  The Supervisor node architecture might suit a small group of large organisations interacting with multiple smaller ones.

Validation: Core to identity and architecture is the method used for validating new transactions.  While Bitcoin blockchain’s ‘proof-of-work’ validation approach is fascinating, and suited to having seven billion people confirm retail transactions, it is not appropriate for wholesale markets.  One of the basic premises for InterChainZ was to focus on exploring “non-blockchain consensus or identity” MDLs, i.e. what benefits could be achieved when not using currencies or tokens.  This decision provoked some external criticism, principally questioning whether there were benefits to MDLs without proof-of-work validation mechanisms.  However, Z/Yen long ago achieved around 1 billion transactions per day, a benchmark a few are now touting, by sacrificing token systems for other validation methods.

Content Chains: The project developed a number of MDLs that directly stored documents, as well as MDLs that only recorded the ‘hash’ of documents.  This led to the development three conceptual MDLs, “identity chains”, “transaction chains”, and “content chains”.  Corporate and individual identity chains authorise access to a transaction chain.  A transaction chain holds the core ledger records of all transactions, but only a hash of original documents.  The content chain is an MDL holding all of the original documents.  The content chain might be managed by a third party for storage and retrieval because of its size.  This conceptual structure is quite flexible.  The only technical difference between the chains is that the identity and content chains have a fixed length hash field while the content chain has a variable length field.

Further Research – IntereXchainZ & MetroGnomo

At a basic level, the project showed that MDLs work and can work together, but current research, IntereXchainZ goes much further, pushing forward four themes:


  • market functions – order matching, margining, account functions, clearing, settlement, as well as possible uses of a token currency within exchange;
  • usability and ergonomics to enhance the end-user experience – exploring the end-user experience by connecting to off-the-shelf wallets for cryptographic key management;


  • integrity proofing – dynamic anomaly and pattern response additions, monitoring and testing facilities;
  • Content Hash-Addressable Storage Market (C#ASM) – extending the ‘identity’, ‘transaction’, and ‘content’ chain thinking that emerged from InterChainZ into an indexable archiving system both as a ledger itself, but also supporting other ledgers;
  • data taxonomies, encryption levels and tracking – how feasible is it to have differently labelled categories and ‘data boxes’ (e.g. health, car insurance, home insurance, driving record, etc. on a person’s MDL) that can only be opened as a group, to encrypt levels with levels (first order health data perhaps before detailed data), to provide access records (who opened, when), and might homomorphic encryption have a role;


  • facilities for automated creation of new mutual distributed ledgers – a parameter driven system providing options for permission management, proof of stake and identity settings, supervisor-master and other node settings, ‘voting’ permutations, and peer-to-peer structure settings;
  • exchange functions – processes to make the basic interacting ledgers into a demonstrator of a full exchange, with numerous ‘use cases’ therein, e.g. sharing identity functions with transactional functions and storing relevant documents securely and permanently;


  • management and control features – management information, performance statistics, visualisation;
  • documentation of standards for mutual distributed ledgers and legal entity identifiers.

And 2016?  Z/Yen are launching a new timestamping service next month with the support of at least one government.  We call it MetroGnomo, a “world record service”.  This is being launched in an experimental mode using MDLs based on ‘agnostic broadcasting’.  The intention is to increase speeds further, increase resilience, and provide a useful, free service showcasing Z/Yen’s technologies.

I Think I’m Turning Koreanese, I Really Think So

Busan - GFCI 17

Had The Vapours had their hit a few years later, who knows how it might have gone.  I went with my friend Mark Yeandle to launch Global Financial Centres Index 17 (yes, 17 since we started in 2005 and published from 2007) in Busan on 23 March.  It was an exciting trip, though I felt rather guilty about 44 hours travel for 36 hours there.  I haven’t been to Busan since the financial meltdown of 1997 and what a change it is.  The city’s population has shrunk slightly, but wow has the quality of life surged – more parks, more recognition of the need for environmental protection and sustainability.  Here we are with some of our hosts after the launch event with the mayor.


Perhaps the most interesting bit of the trip was seeing how they focus on greeting visitors.  Busan is geared to having a single administrative area where new businesses are whisked through the variety of offices they need to visit in a single day in a single area.  Two particularly interesting items for businesses thinking of coming to Busan were a 1:2000 and also a nearby 1:4000 scale model of the city.  Here’s a photo of the 1:2000.


Further, the Korean Stock Exchange, which evolved from the traditional rice market trade in the port, is headquartered here.  Unlike certain London exchanges, they have a fantastic museum for the public.


Though talking about comparable tourism among financial centres does give me an opportunity to plug the City of London Walk of Commerce & Finance Z/Yen helped create – free ebook for the public.  Heading home was hard, as I loved the food and the hospitality of our hosts, though I won’t miss some extremely, too extremely, fresh octopus.


On the flight back, I cracked open a thriller written by a friend, Blue Eye by Tracy Elner, only to find that it is set on Lake Baikal – look at what was outside the window of the Korean Air flight home.

Knightian Ignorance – “Are You Not Thinking What I’m Not Thinking?”

Voltaire said, “Doubt is not an agreeable condition, but certainty is absurd.”  I was asked to share my ignorance by speaking about uncertainty and finance at the Calculating & Communicating Uncertainty Conference on 27 January 2015 at BIS, London.  The event was sponsored by the UK Ministry of Defence, Defence Science & Technology Laboratory (DSTL) and Public Health England, and organised by the University of Southampton.  You can read the full talk, “Where The Numbers Meet The Road – Uncertainty At The Frontiers Of Finance”.  As my highlight, I would point out how much I enjoyed sharing with the audience my concept of “Knightian Ignorance”.

DSTL Conference 2015.01.27

University of Chicago economist Frank Knight (1885–1972) distinguished risk and uncertainty in his 1921 work Risk, Uncertainty, and Profit.  Risk is something you can assess by knowing impact and likelihood.  Uncertainty is something you realise might happen, but can’t quantify.  Black Swans and unknown unknowns are popular party points today.  To explain the conjunction of known unknowns and unknown unknowns I remembered the UK Conservative Party’s crude slogan under Michael Howard in the 2005 general election, “Are you thinking what we’re thinking?”  I could explain known unknowns and unknown unknowns as Knightian Ignorance, “Are you not thinking what I’m not thinking?”  Enjoy!

Sir Thomas Gresham: Tudor, Trader, Shipper, Spy and the Ladies of Dulwich

What a most interesting talk to give. My dear friend, Robin Sherlock KCLJ MA, former Chief Commoner of the City of London Corporation, asked me to speak at the Ladies’ Dinner of The Dulwich Club where he has been Senior Steward the past year. The Club, founded in 1772, is one of the oldest dining societies in the world. Elisabeth and I found the entire evening a delight. Haberdashers’ Hall was rebuilt after the fire of 1666 and the bombing of WWII, yet the Company made a brave decision to open one of the most tasteful modern halls in 2002, a true architectural gem opposite St Barthomew’s.

Giving a talk to The Dulwich Club was no easy task, as they’ve heard them all before. I was a bit trepidatious, particularly as the Junior Steward, Bruce Purgavie made clear my ignorance of football yet expected me to show some rocket science skills the night after Guy Fawkes. What can one say? Well, this was it:

Sir Thomas Gresham: Tudor, Trader, Shipper, Spy

The Dulwich Club – Ladies Night Dinner
Haberdashers’ Hall
Thursday, 6 November 2014

“Senior Steward, Junior Steward, my Lords, distinguished Guests, Ladies. When Robin suggested that I have a dinner with the Ladies of London’s most exclusive dining society, I was particularly pleased. When he suggested I bring along my Lady Elisabeth, while delighted of course, I began to realise it wasn’t my looks – I would be lecturing for my dinner on behalf of the Visitors.

Robin suggested I do a serious talk, after all the jokes, about being a newish Alderman, so I naturally thought of ward disputes, governance, compliance, and endless committee meetings to share with you. Robin wondered if perhaps there was something slightly more interesting, so let me share with you one fun project of the Joint Grand Gresham Committee – a biography on Sir Thomas Gresham: Tudor, Trader, Shipper, Spy, born 1519, died 1579.

When I was a boy two-door was what you bought when you couldn’t afford four-door, but Gresham served four Tudor monarchs, managed to keep his head, and all the while made money. Lots of it. He probably died comparatively wealthier than Bill Gates or Warren Buffett. 435 years later his legacy still generates millions for good causes. We have Gresham Street. We have his statue a few hundred yards away on Holborn viaduct, another at the Royal Exchange. We have his Tower 42 Mansion site, Osterley Park, Boston Manor. His grave at St Helen’s Bishopsgate. We have grasshoppers everywhere – on the top of the Royal Exchange, at 68 Lombard Street, on stained glass windows.

Gresham was born on Cheapside and attended St Paul’s School and Gonville College, Cambridge. In 1543 he went to Antwerp to make his fortune as a Mercer. Antwerp then was very cosmopolitan and large for the time, with a population approaching 100,000, double London or Rome. Just 25 merchants accounted for half of London’s cloth exports, and the two biggest exporters were the brothers John Gresham and Richard Gresham, Thomas’s father.

Gresham imported from Antwerp the idea of a ‘bourse’ or ‘exchange’ for intangible items such as ship voyages and insurance. Incorporated into the 1571 Royal Exchange were 150 small shops, called The Pawn, London’s first shopping centre. From within St Martin’s Goldsmiths he experimented with fractional reserve gold stores, cornering markets, and insider trading. His Will, enacted upon his death in 1579, created Gresham College and challenged the ‘Oxbridge’ oligopoly in higher education.

We are commissioning a biography which we hope to publish on the quincentenary of his birth, 2019. But what does a Tudor have to say about contemporary issues? I thought I’d ‘channel’ Gresham on three questions today:
1 – what should we do about our banks?
2 – what should we do about our currency?
3 – what should we do about Europe?

1 – What Should We Do About Our Banks?

Gresham was probably one of the first goldsmiths to issue more certificates for gold in the vaults than he had. Our modern economic terms are fractional reserve banking or leveraged banking. So rather than letting banks such as RBS in 2008 lend 42 times what they had in the vaults, Gresham would probably recommend tight control over leverage. He might have recommended that our quantitative easing continue to the point that our banks were lending little more than they have in their vaults.

2 – What Should We Do About Our Currency?

Gresham explained to Elizabeth I that because Henry VIII and Edward VI had replaced 40% of the silver in shillings with base metal, ‘all your fyne gold was conveyed out of this your realm.’ Colloquially expressed as “bad money drives out good”, Gresham’s Law was attributed to him in 1858 by a Scottish economist. Two awkward bits – the Law is the reverse, “good money drives out bad”, and Gresham’s Law was not his; it was noted much much earlier by many, starting with Aristophanes. The Nobel economist Robert Mundell rephrased Gresham’s Law more properly as “cheap money drives out dear money only if they must be exchanged for the same price”.

In 1551 Edward VI appointed Thomas as Royal Agent in Antwerp. A clever and shrewd dealer, Gresham reduced royal indebtedness from £325,000 to £108,000. He reduced the national debt by two-thirds in nine months. Under so-called ‘austerity’, UK national debt has grown over the past four years by a third. William Cecil put Gresham in charge of recoinage in 1560. To his, Elizabeth’s, and Cecil’s credit, within a year debased money was withdrawn, melted, and replaced, with a profit to the Crown estimated at £50,000.

Gresham stood for an independent pound sterling. He certainly wouldn’t have sold off the national gold reserve. More interestingly, he might also have supported an independent London currency.

3 – What Should We Do About Europe?

A Gresham ship from 1570 was re-discovered in the Thames in 2003; its cannons inscribed with grasshoppers and marked ‘TG’. There are tales of bullion concealed in bales of pepper or armour. Gresham was clearly a “merchant adventurer” with a network of European agents, though the sobriquet ‘arms-dealer’ might equally apply.

The Royal Exchange began as his father’s idea, but the idea behind the exchange and the shops was that London prospers when all who come for exchange are treated fairly.

Gresham was a free trader and Europhile, yet also a realist and a spy, committed to engaging with Europe, vigorously, but for mutual and selfish benefit.

Hop To It

I must end on grasshoppers, in two ways – the family symbol and Kung Fu. The Gresham grasshopper first appears in the mid-1400’s. According to family legend, the founder of the family, Roger de Gresham, was abandoned as a baby in long grass in North Norfolk in the 13th century. A woman’s attention was drawn to the foundling by a grasshopper. While a beautiful story, a more likely explanation is that the Middle English word ‘gressop’ for ‘grasshopper’ resembles ‘Gresham’. I think the Royal Exchange may have taken the theme too far – if you look on the south side just now it reads, “luxury shopping”, but the “s” has temporarily fallen off. Luxury hopping?

And Kung Fu? Well grasshoppers, you’ll remember David Carradine and the 1970 television series – ‘grasshoppers’ are students. Gresham believed in the power of education for all. His Tudor Open University spawned ‘The Royal Society of London for Improving Natural Knowledge’ after a 1660 lecture by Sir Christopher Wren, then Professor of Astronomy. Today Gresham College hosts over 130 physical events per year free to the public, distributes recordings under a Creative Commons licence, and provides millions of people with lecture transcripts and recordings via the internet.

A century after Gresham’s death Samuel Pepys enjoyed Gresham’s legacies, listening to one of the professors ‘sufficiently learned to reade the lectures’, then strolling through the Royal Exchange afterwards in search of a gift for a loved one, as can you today well over three centuries later. We’re pleased to be setting out on the first proper biography and I hope you feel he is a worthy subject. What I might ask you to do is look around the City and wonder at how we ourselves could leave a comparable legacy for the next half a millennium. We, your grateful guests, know the Dulwich Club will be full of enthusiastic ideas. Thank you!”

And for even more…

Michael Mainelli and Valerie Shrimplin, “Sir Thomas Gresham: Tudor, Trader, Shipper, Spy”, London Topographical Society Newsletter, Number 79 (November 2014), pages 3-6.

CISI Annual Integrity Debate 2014: Do UK Savers & Investors Get A Fair Deal?

One of the more difficult tasks can be substituting at the last moment in a debating team.  It happens more than you wish.  You haven’t worked on creating the question and always wish it was different.  The person for whom you’re substituting is often the one you’d  most dispute.  This year I was asked to help the CISI and debate the question  ‘Do UK savers and investors get a fair deal?’

CISI logo“Whether it’s interest rates offered by banks, charges imposed by intermediaries or fees charged by asset managers, we are constantly assailed by stories suggesting that once again, the unsuspecting public is being taken for a ride.  So is it any surprise that so many people are reluctant to save through conventional channels and is there any truth in all or even some of this?”

In favour of the motion:
Dr Tim May MCSI, CEO, Wealth Management Association (WMA)
The Rt Hon John Redwood MP MCSI

Against the motion:
Will Hutton, Author and Financial Commentator
Alderman Professor Michael Mainelli, Chartered FCSI, Executive Chairman, Z/Yen

Will was great to work with and I have a lot of respect for Tim and John.  In the event, Will and I technically won, but Tim and John actually won, having moved more of the audience to their side.  John did some excellent pandering to the audience – “these guys are pessimistic; be optimistic; be selfish; congratulate yourselves”.  The pandering was decidedly effective.  Probably tells you something about those of us who work in finance.  The event was moderated by Stephanie Flanders, Chief Market Strategist, JP Morgan Asset Management and Former BBC Economics Editor.  She’s also speaking at our Gresham College January Magna Carta Uncovered event.  Anyway, here were my opening remarks:

CISI Integrity Debate 2014

Wednesday, 24 September 2014
Plaisterers’ Hall, London

“Do UK Savers And Investors Get A Fair Deal?”

 Fellow Aldermen, Distinguished Guests, Ladies and Gentlemen.  Tonight I have the distasteful job of biting the hand that feeds me.  I must be risking madness because I agree with the Chief Vampire Squid at Goldman Sachs that financial services has the ability to do God’s work.  Paraphrasing last week’s St Matthew’s Day sermon, “If love of money is the root of all evil, then the study of money must be the source of much madness.”

In 2005 our Long Finance movement asked “when would we know our financial system is working?”  At our 2011 conference on bubbles John Redwood pointed out there that he could show you an economy with no bubbles, North Korea.  He’s correct, we don’t want to occupy a bubble-free, scandal-free economy.  Yet financial services bubbles and scandals seem to lose our economy at least seven years of growth every generation.  We can improve, massively.

Folks in the agrarian countryside, somewhere outside the Circle Line, know the City is the Devil’s inherently unfair machine designed to relieve naïve bumpkins of their money.  Kicking off with the 1698 Darien Disaster that determined last week’s referendum, we move swiftly to the South Sea Bubble, and railway shares.  In the 1970s we sell the bumpkins Rolls Razor, Bank of Gibraltar, and BCCI.  In the 1980s we hawk endowment mortgages, Barlow Clowes, Equitable Life, and Lloyd’s names.

In the 1990s I penned a piece, “How I Learned To Start Worrying And Love The Dot.Bomb.”  Castigated for my negativity and browbeaten to chant that “under our new unified FSA there will be no problems”, we opened the millennium with the the supposedly 1-in-300 year onslaught of Waste Management, Enron, Global Crossing, Worldcom, Sunbeam, Dynegy, Nicor, and Halliburton.  The authorities sacrificed Arthur Andersen and shored up the remaining four audit firms who managed on their own to produce Adelphia, Freddie Mac, Duke Energy, Kmart,, HealthSouth, ImClone, Nortel and AIG round one.

And then after we really really made sure that scandals were a thing of the past and that every little bit helps a big four auditor or regulator avoid another Tesco, we had precipice bonds, Bear Stearns, Lehman Brothers, AIG round two, Fannie Mae, Freddie Mac, Northern Rock, RBS, Lloyds the bank, Iceland, Ireland, the whole UK, and even the world economy, fortunately saved by Gordon selling our gold.  Whew!  I thought a ‘fair deal’ was one that benefits both parties.  How wrong I was.  I have a simple intelligence versus integrity balance.  When something goes wrong you are either stupid or corrupt.  It’s hard to be both, though possible, but the smart person chooses hypocrisy.

I love all those former bankers and ministers who have found God and their pension payments in retirement, for they have inherited the earth.  So many of them shaking their heads and muttering about values, ethics, and standards.  Balzac knew them, «Le secret des grandes fortunes sans cause apparente est un crime oublié, parce qu’il a été proprement fait.» “The secret of great fortunes without apparent cause is a crime forgotten, for it was properly done.” [Honoré de Balzac (1799-1850), Le Père Goriot (1835)]

Scandal and salvation are staggering, PPI – estimates near £50bn, saving the UK financial system,  the IMF estimates an entire year of UK GDP £1.227 trillion.  Thank God for QE and recovery, by which I mean LIBOR, mis-sold interest rate swaps, RBS Global Restructuring Group, FX scandals, let alone looming scandals in gold, aluminium, and oil.  Heck, even Calpers the other week abandoned the hedge fund sector as a bad deal.

Our opposition may blame the victims.  In 2008 usurious savers put 25% of the nation’s cash in the nation’s riskiest financial product – paying 4.5% under 4.5% inflation, zero real return – an RBS deposit account.  Our industry can’t advise on basic day-to-day cash management without the government rescuing us, designed by us clever clogs, promoted by trained experts, audited by geniuses, regulated by Newtons, presided over by the Einsteins of politics.  We congratulate ourselves on our housing wealth and wring our hands about homeless young families.  We’ve managed to so abuse our golden goose pension products we’ve destroyed all defined benefits.

Our professional advice was to speculate, speculate, speculate, but call it investment.  We, so-called professionals, left honesty and self-control to neophyte regulators.  We failed to regulate ourselves.  We took advantage of the weak, the savers and investors outside the Circle Line.  Our best friends call us “socially useless”.  Your choice tonight? Vote for what we lack – do we lack integrity or do we lack intelligence.  Smart – Stupid.  Devious – Daredevils.

Tonight be detectives and consider motive, means and opportunity.  Motive – we have greed and fear, power and sex, and all of the seven deadly sins.  So-called reforms are religious dogma – ethics, better regulation, controlled bonuses – we invoke integrity not intelligence.  Financial services chants: ‘regulation failed because you really really didn’t believe in regulation.’ So pray harder. Next time let’s use better pixie dust.

Means – agency problems, information asymmetries, externalities.  The one guaranteed way to make money is to convince people that you have a sure-fire way to make money.  Leading people into scams is dishonest, but successfully predicting where people will go constitutes honest investment winnings – think the front-running of high-frequency trading.  The Tudors knew the second sure-fire way to make money, get a monopoly.  Five banks control nearly 90% of the market.  Why does the UK have 50 or so retail banks when Germany has 2,000 and the USA 8,000?  Auditors, credit rating agencies, and many other cartels.  We have a moral obligation to open and competitive markets.

Opportunity – Galbraith believed that, “Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich.”   Why be honest that savings should be invested in producing assets, not lottery tickets?  We prey on the stupidity, the gullibility, and to be fair, the greed and fear of others.

Money is a technology communities use to trade debts.  A few trillion here or there soon add up to an acute monetary Armageddon.  Governments create future tax debts, savers are taxpayers, taxpayers are pensioners, future tax debts are money.  The national debt ensures we are all in it together!  First and foremost we have an obligation to avoid harming the monetary system.

Second, in a fair deal – we will use our brains for changes that eliminate cartels and challenge leverage, with Martin Wolf a recent convert to the cause.

Third, as Thomas Jefferson said – “Commerce and honest friendship with all.”  Fellow human beings, not punters or bumpkins or sheep to be shorn.  In a fair deal – we will regulate ourselves not heap blame on government or society.

I’ll quote Warren Buffett, “… Sir Isaac Newton gave us three laws of motion, which were the work of genius.  But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men’.   If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion:  For investors as a whole, returns decrease as motion increases.” [2005 Berkshire Hathaway Chairman’s Letter]  I charge us, the financial services industry, as guilty of increasing illegal motion, peddling unfair deals, yet being very clever.  To vote that we are all very smart, you have to vote that we’re unfair and lack integrity.  Thank you.

Postscript – Of course, just a week later it was revealed that across most of Europe pensions have not delivered – – ” in Belgium, Britain, France, Italy and Spain, the real (after inflation) returns from private pension schemes have been negative for much of this century”.

Banking About In Boats

Kathleen Tyson-Quah is a generous friend letting us bounce around the Regents Canal with her several times on her assortment of river craft.  Literally bouncing off the banks on a few occasions.  We had just had some fun at the 2014 Canalway Cavalcade London in Paddington Basin when Kathleen let David Shirreff take the wheel of her new possession, Diona. 

2014-05-05 18.09.46 edit

David knows a lot about banks as a former Economist writer.  His new book “Don’t Start from Here: We Need a Banking Revolution” comes out in September.  BTW – he means financial banks not river banks.  And no, despite the drink on view, not a single scratch!

Not So Foolish April

April turned out to be a whirlwind month rather than a showery one.  The month opened with a not-April-fool article in Banking Technology, co-written with my friend Bob McDowall and published promptly courtesy of my friend, editor David Bannister.  This article set the tone for a whole series of meetings and initiatives around blockchain technologies.

Building Bit – What’s A Poor Government To Do About AltCoins? Michael Mainelli and Bob McDowall 2014
Banking Technology, Informa plc (April 2014), pages 30-33.

Equally interesting though have been the numerous reactions to Z/Yen’s publication of Global FInancial Centres Index 15 showing London pipped for the top spot by New York City.

The Global Financial Centres Index 15 Mark Yeandle and others 2014
Long Finance & Qatar Financial Centre Authority (March 2014), 58 pages.

Nobody volunteered to write the foreword, so sadly I had to pen the following:

“London’s powerful wholesale financial markets, which leverage its strong brand, generate disproportionate benefits in jobs and exports.  London suffers when global financial news tarnishes that brand – London-IBOR, the London Whale, the foreign exchange scandal only now starting to bite, with rumours circulating about other index, benchmark, and commodities scandals. In fact, it seems increasingly apparent that authorities were aware of, yet tolerated, the LIBOR scandal well into 2012. If the regulators are unimpressive, they are certainly not inexpensive. Some claim that the majority of jobs created have been in compliance departments or compliance providers, accountants or actuaries or lawyers. A Middle Eastern businessman states the problem plainly, “though deals have become vastly more expensive, I don’t feel any safer.” “

It probably doesn’t get more encouraging to read a related snippet from IFC Economic Report which made it into our Gresham Symposium, “Saving Havens: Off Shore, Onshore, Midshore: International Financial Centres“:

“From January to June 2013, the UK media had headlines such as “Google, Amazon, Starbucks: The rise of ‘tax shaming’” (BBC), and “David Cameron: Tax avoiding foreign firms like Starbucks and Amazon lack ‘moral scruples’” (The Telegraph).  In late June 2013, Starbucks agreed to pay £10 million to the UK Treasury.  Given that Starbucks reportedly paid no tax in the previous four years, £8.6m in corporation tax in the UK over the previous 14 years, yet had sales in the UK of £400m per annum, this might sound like a victory over tax evasion.

At no point has any authority accused Starbucks of not complying with tax law.  Having followed the tax code correctly, Starbucks reached annual agreements with HM Revenue & Customs that little or no corporation tax was payable.  The majority of people seem to have no problem with Starbucks’ payment or feel an urgent need to reform tax laws.  However, as an accountant I wonder how the payment should be booked.  Certainly not to marketing or advertising expenses?  Possibly to tax?  Tax liabilities have always been a complicated area, but in this case is the payment:

  • a mistake, an adjustment to historic tax liabilities, or a retroactive tax?
  • a bonus payment or donation to HM Revenue & Customs?
  • a donation or bribe paid to the UK coalition government, or perhaps David Cameron’s Conservative Party?
  • a shakedown or protection racket payment to a corrupt government?

Perhaps I might mischievously suggest that Starbucks be reported to the US authorities under The Foreign Corrupt Practices Act of 1977 which “was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.” [US Department of Justice website]  The rules on international corporate taxation are close to unworkable, though I wonder why more people do not question the theoretical basis for taxing corporations, which is at best dubious.” 

Socially, April was much more upbeat.  There was the whirlwind contrast of greeting the President of Ireland, Michael Higgins, and the Taoiseach, Enda Kenny, at Mansion House and Guildhall, with the celebrations of St George’s Day.  It was quite emotional hearing the Irish National Anthem, “Amhrán na bhFiann”, being played in the Guildhall in honour on the evening of 9 April.  Something I never expected to hear three decades ago, yet also a sound that still discomfits those who lost loved ones during the Troubles.  The Lord Mayor’s excellent speech on the night says it all.  

Increasingly emotional too were this year’s celebrations in honour of St George’s Day, 23 April.  Three decades ago it was not a day one heard much about.  Today, there isn’t a patriotic pub not festooned with flags.  I attended two notable events.  Courtesy of Dudley Edmunds, I was able to hear a wonderful talk from the last of the dambusters, Johnny Johnson.  Bright as a button and with a deft touch to his talk, Johnny made you realise what a group of determined young men could achieve, and still retain their humanity, as he related the story of 617 Squadron’s May 1943 raid.


The second event was the St George’s Dinner at the Honorable Artillery Company which I attended for the first time in an ex officio Aldermanic capacity in Old Bailey velvets.  The female officer toasting the guests reminded the guest of honour, the US ambassador, that the Company and the USA had had some low and high points in their relationship, such as burning the White House in 1814, though she left us a bit misdirected about high and low.  We concluded the dinner with three rounds singing Rule Brittania, Land of Hope and Glory, and Jerusalem along with the band and accompanied by the American ambassador, which wound up with us standing on the tables in formal wear and waving our napkins.  The photo above was taken as I left about midnight, outsung and outdrunk by men and women who’d entered military service in the 1940’s and 1950’s.

Safer Cities – open data, cyber insurance, new currencies

Safer Cities – People, Security, Technology
Alderman Professor Michael Mainelli
CityForum –
Monday, 10 March 2014
One Whitehall Place, London SW1

As a student of international economics, I’ve been asked to provide some comments today on Safer Cities. In 1800, only three percent of the global population lived in cities and only one city, London, had more than a million people. In 2008 more than 50% of the world lived in cities and there were well over 300 cities with a population over one million people. Despite working with many cities on things such as the Global Financial Centres Index or futures work on drone delivery strategies or new currencies, I’ve never claimed to be a City guru. However, you don’t need a guru – the question “what makes a great economic city” has a simple one word answer – Trade.


Cities reduce the degrees of separation. People come to cities to trade. What makes cities strong is the free flow of goods, capital, services, labour, and intellectual property. Gross World Product is about $50 trillion, and trade is over $25 trillion. In fact, 25% to 40% of trade is non-monetary, so global trade is not far off Global World Product, though this is a bit of an apples and oranges comparison. Now, can you name my economic hero of the 20th century? He transformed the UK road network, destroyed the northern ports, and devastated east London. He was of Scottish descent. Several cities such as Oakland, California or Tanjung Pelepas in Malaysia sprang from nowhere due to him. His innovation created London’s Tilbury port. He is of course Malcom McLean, father of the shipping container.

The biggest gains for peoples of the world have been through free trade. When major eastern economies embraced free trade, almost two billion people were lifted out of poverty. The biggest innovation of the 20th century that contributed to reducing poverty was probably also the sea container.

So let’s look at security. One of my favourite Benjamin Franklin quotes is: “Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety”. Franklin meant, of course, that even seemingly minor or transient curbs on freedom should not be tolerated. American representative democracy required a compact with markets that did give up some essential liberties to regulators in order to purchase a little temporary safety. Madison notes in The Federalist Papers, “The regulation of commerce, it is true, is a new power; but that seems to be an addition which few oppose, and from which no apprehensions are entertained.” I think Madison underestimated the apprehensions.

We have to get the relationship between commerce and our security services right. So what are my thoughts on safer cities? One of my big cyber security fears is hacking those same sea container stacking systems on the docks and randomly shuffling them. We might slowly starve and riot, unable to get at the scrambled stacks with food inside. I want to talk about non-physical trade, so I’ll point out that the biggest shift in trade today also involves containerisation – the data packets transmitted and swapped over the internet. I shall provide three points for discussion on weightless, online trading – open data, cyber insurance, and the changing nature of money.

First, I wonder, with the Lord Mayor Alderman Fiona Woolf CBE, if how we gather and exchange data might define a city. Perhaps, our new city wall is a data wall. Our new reservoir is our data store. Perhaps on entry to a city we contract to provide movement information from our smart phones to help transport planning – a mobile app passport. If I get planning permission to build a block of flats, must I provide ways of sharing energy, occupancy, or waste information with the city, which it anonymises, stores, and then shares more widely. I can link up with neighbours to consider new power or water treatment plants because I have the data on local consumers, their needs, their usage patterns. There are liberty and security issues, certainly, but more open data could transform London and other cities. We’ve seen this locally in minor ways with transport apps. We’ve seen this globally in major ways with GPS or weather data. Perhaps we should be freer with Land Registry data. Perhaps utilities should have sharing obligations in exchange for their quasi-monopolies. Perhaps cities should have open source blockchains of recorded trades within their walls. A safer, wealth producing City has to reset a number of boundaries, to build new city walls around reservoirs of data, keeping out the highwaymen of the internet. I might go further and muse on how fundamental reform of patents and copyright might help trade in data by lowering trade conflict, but due to time shall move on.

Second, we have to make data trade and cyber issues commercially ‘normal’. The state of commercial normalcy for most risks, think fire, theft, flood, for a business is that – after a business has done all the right things – it can then buy insurance. Why don’t we have a Cyber Re (or extend the existing Pool Re for terrorism insurance) where government becomes a partner to the insurance industry funding the extreme losses of cyber-crime, learning how to talk to industry in commercial terms? With reinsurance, normal insurers write cyber policies which help spread information and best practice. A Cyber Re helps promote a stronger ICT security industry and a more promising national location for ICT business. Cyber Re would provide proof that ICT security technology works, in financial terms. Normalcy is more than just cyber. I’d include working visas & immigration, regulation, and taxation in commercial normalcy. Given the number of financial scandals over the internet, such as FX, the regulators are unintelligent but they are not inexpensive. Retroactive or ‘shakedown’ taxation is equally reprehensible. Perhaps I might mischievously suggest that Starbucks be reported to the US authorities for paying £20 million to HMRC recently. The Foreign Corrupt Practices Act of 1977 “was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.” [US Department of Justice website] Reducing trade frictions generated by immigration, regulation, and taxation, which are security-related, e.g. Anti-Money Laundering, will help cities flourish economically. Security has a cost, but efficient security pays. But I’ll move on.

Third, money is traded online via data packets. And the nature of money is changing. Bitcoin has the headlines. Bitcoin’s essential innovation was a public blockchain, which eliminates the need for a central bank by making the entire network the record of transactions. From several possible choices of currency architecture, Bitcoin chose to set a maximum fixed supply of 21 million coins. This fixed supply means that Bitcoin is possibly best compared with gold. Gold is also an element with a fixed earthly supply. Imagine Bitcoin as a virtual element. We know what the supply is. We know where most of it is, and can mine a bit more. However, it is not money. It is a virtual element, weightless. Only a community can decide whether to use it to trade. So far, many of the allegations for or against Bitcoin focus on what type of community is perceived to be using it to trade debts – a Silk Road of illegal transactions, quixotic libertarians damning profligate governments, new age gold bugs, or hard-pressed traders in a tight credit environment.

Many people dismiss cryptocurrencies out of hand, forgetting that in times of economic turmoil and tight credit alternative currencies flourish. Well over 400 currencies sprang up in the USA in the 1930’s to fill credit gaps. The eighty year old Swiss WIR is a government-sanctioned trade currency still providing useful credit to a quarter of Swiss businesses counter-cyclically to the Swiss Franc. Bitcoin may fail, but it is already economically important. A quick insanity check – the five year old Bitcoin has a market capitalisation today of several billion dollars, albeit fluctuating wildly, with about the same market capitalisation as the two century old London Stock Exchange Group.

In summary, successful, safe cities are safer places to trade. We need to understand that data containerisation, the internet packet, is transforming them. We need to provide more smoothly swapped open data, normalise cyber risk, and embrace the innovation cryptocurrencies provide. Thank you.

Season’s Meetings – 2013

It would be difficult to cram in any more events between the parties.  Not only have we had the Z/Yen Christmas Party, my 27th annual boozy breakfast on Lady Daphne (beer courtesy of Fuller’s!), the annual Broad Street Ward Club luncheon, carol services at St Margaret Lothbury, and numerous other events, but work has been frenzied too.  Try some of these fascinating links for some variety, not even the half of it:

Then some amazing Financial Times coverage of a project we cooked up with Bob McDowall of Alderney over the summer:

but perhaps most noteworthy for me was the honour of presenting at this University of Sussex workshop for Onora O’Neill – – terrifying to be a business person presenting to philosophers, but Onora made it rewarding.  And that’s just bits of December, though a nice, closing for the year before heading away to Germany for Wolpertinger habitat preservation work –  So I’ll leave a stressful 2013 behind with the following picture of peace and The Shard in fog after a few beers on a cold morning at St Katharine’s Dock.  Prost Neujahr 2014.


Key To The City

Watched Stephen Fry blend entertainment and reporting – “Key To The City” (of London) on ITVPlayer. Worked for me –  Nice to see a lot of people I know doing their part and proud of the City and their work.  While attitudes have come a long way from the depths of November 2011 (see Occupy’s Tent City University outside St Paul’s Cathedral photo below – and note The Price of Fish seminar), the City still needs more reforms.  We need to earn respect, not demand it.  This past week we’ve seen lows and highs, from probable scandals in the aluminium markets to Mansion House continuing to develop the City Values Forum.  Long Finance respects the intentions of Occupy but believes that gradual, evolutionary reform from within is better than revolutionary reform from without.  If you believe that too, get involved.