Tulips from Amsterdam...
As they almost say at the start of each episode of Fargo...This is a true story. The events depicted below took place in London in around 1993. At the request of the survivors, the names have been changed. Out of respect for the dead, the rest has been told exactly as it occurred.
Brad was from Columbus, Ohio and had made his modest fortune by realising early on that CT scanners were going to be a game changer. In the States, large hospitals just went out and bought one, but smaller hospitals were pinned on the horns of a dilemma – if they didn’t have one they’d lose patients to those that did and go bust; if they did have one they were so ruinously expensive that the cost would surely drive them under. Step in Brad with his light-bulb idea. He mounted a scanner on the back of an artic trailer, split hospitals into groups of five, each of which had a fully-staffed scanner in their carpark for a day a week. Each hospital paid a quarter of the costs – Brad got to pocket the fifth quarter. He was not the only person to have spotted this, but he was one of the first and his ten rigs gave him a tidy income.
Now he was looking for help to fund a new venture in Estonia. He’d developed a good working relationship with Eli Lilly through his scanner business and negotiated the rights to distribute their pharmaceuticals in the newly liberated Estonia. We’d never met; we’d communicated by phone and fax (remember those?) but he came well recommended and I had no reason to doubt him. He was flying into Stansted from Amsterdam. We were to rendezvous there before heading to the City to meet the bankers and money men.
‘How will I recognise you?’
‘Wellllll’ the slow drawl came back ‘I think you’ll notice me. I’m about 6-4 and, let’s just say, I look after myself’
So, I pitch up at Stansted full of expectation. The flight is delayed but eventually the passengers start filtering through. I look, ever more desperately, for the tanned demi-god that is Brad. Eventually the passengers drift away and I am left alone in the arrival lounge – alone except for a dishevelled, tubby man in a brown mac.
As Sherlock Holmes observed, once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth. With a heavy heart I cross to him. As I get closer it becomes obvious that, despite his claims, he didn’t look after himself terribly well and he was a good six inches short of 6-4.
Yeah, that’s me.
Even his handshake was disappointingly insipid. I knew at that moment this was not going to end well…
On one level, it didn’t really matter that Brad had fibbed, but it meant I stopped taking anything else he said at face value – he’d lost my trust.
It’s interesting to think about how trust impacts on our society. 2017 was the year Bitcoin became the investment opportunity of the century or the latest incarnation of tulip mania (depending, I suspect, on whether you had the foresight to buy some or not). As I didn’t buy any, naturally I sit firmly on tulip mania side of the fence, waiting like a tricoteuse for the blade to fall.
My scepticism isn’t solely driven by the delicious anticipation of inevitable schadenfreude. The sub-prime mortgage calamity morphed into a full-blown financial crisis because banks stopped trusting one another. Bitcoin was born of this lack of trust; it created a quest for a means of exchange unshackled from the central banking system. Crypto-currency adherents claim this year’s volatility evidences the arrival at a tipping point of acceptance and the new currencies are simply finding their level before settling down. I don’t buy this.
While there are traditional currencies that exhibit similar levels of volatility they tend to have little value – think Zimbabwean dollars. Relative stability is surely a sine qua non of a currency? It is not much good to me if I have no idea whether the money I am going to be paid at the end of the month will buy me a banquet or a baguette. I also need to be able to get my money back, not be faced by a red screen. Liquidity isn’t an issue while bitcoins are being traded within the system, but what about when I want to turn my gains into a house or yacht, especially if lots of other people decide to cash in their chips at the same time? Until crypto-currencies start behaving more like traditional currencies in terms of volatility and liquidity (and, by implication, credibility) then they will remain a speculative asset where it will be possible to make exceptional gains – and losses.
What I think is more interesting is the potential in the underlying blockchain technology. An efficient, robust means of registering ownership or confirming a series of transactions of pretty much any asset (for example, the supply history of an ethical product) is an attractive prospect.
So, what is blockchain?
Let’s start with the system we’re all familiar with. If I give you a five pound note what am I actually doing? I’m handing you a piece of paper that represents my ownership of five pounds worth of stuff so now you have a piece of paper that you can exchange for five pounds worth of stuff. The great thing is you don’t need to take my stuff that you probably don’t want – you can use it to get your own stuff (that you probably won’t want for long either).
It all works because rather than me simply writing out my own IOUs until I run out of paper they are written by the Bank of England. This means you can be confident that anyone will swap your piece of paper for five pounds worth of stuff; the Bank stands behind it, saying that if there’s any problems they’ll pay you - promise. It’s what is known as fiat money – it is created by government fiat or decree. OK, but what if I don’t give you a five pound note but instead transfer five pounds from my bank account to yours? In this case the record of the transaction is held on the ledgers in my bank and yours. If we don’t use the same bank then the banking system oversees communication between the two institutions and most of the time it works pretty well.
Blockchain replaces the central ledgers of a limited number of banks with a practically limitless network of users, or nodes, each of which holds identical copies of the transaction ledgers. Pick any two at random and ask them to confirm a transaction. If they agree then it’s pretty certain the transaction is above-board. If you still need convincing, pick another at random. And another. And another… until you are satisfied.
Money is a particularly easy asset to move around. It is fungible. One pound is the same as any other pound so, as long as the totals tally, there is no need to actually move money between banks. There will doubtless be a balance due to one or another party but as long as there’s trust between them this doesn’t need to be delivered, simply recorded on a ledger.
Blockchain means you don’t even need to trust anyone – the network replaces trust with robust processes. Of course, holding thousands and thousands of copies of ever-increasing amounts of the same information on thousands and thousands of computers doesn’t come cheap and one if the uncertainties around blockchain, once you’ve got over concerns about the quality of the underlying code and the security of your bytes, is whether this will work out cheaper than the status quo.
We have other institutions to track ownership. The Land Registry records property ownership and covers around 85% of UK properties. It gives security to buyers because anyone who suffers loss because of an error or omission in the register, or because the register needs to be corrected, will normally be compensated. Blockchain offers the potential for a virtual alternative to central asset registries which could be transformational for people living at the margins with low value assets of which they nevertheless need to be able to prove ownership. If blockchain can be shown to work, and be cost-effective, it represents a disruptive existential threat much of the financial services industry which exists primarily to facilitate, track and manage financial transactions. Could this be the catalyst for banks to shift their focus from transactions to richer client interactions?
Back in London, Brad and I were having our own financial services trust problems. The early meetings did not go well. Looking back, Brad shared many of Donald Trump’s traits – he was brash, boorish and loud. By around three we had managed to offend a succession of well-meaning people and had run out of places to go. The fiduciary account for the funding was to be held at Hoare’s and Brad decided he would like to open an account.
C Hoare and Co is Britain’s oldest private bank, used by the sort of people who regard Coutts as too common. We found ourselves in their Fleet Street branch where a top-hatted commissionaire directed us to the banking hall. Tellers in morning suits sat on high stools at computer terminals behind brass bars while customers quietly went about their business of transferring squillions between trust funds. Brad was palpably unsettled by the quiet calm.
‘My name’s Brad and I’d like to open an account in this here bank’ his loud voice boomed from the centre of the room and echoed around the hall, shattering the tranquillity. Within seconds a phalanx of betailed tellers surrounded us and firmly shepherded us to an anteroom. There followed an excruciatingly embarrassing hour’s interview with one of their managers, with Brad exhibiting a full panoply of Trumpesque behaviours. Unsurprisingly, we left without an account.
‘Went pretty well, eh Rich?’ was Brad’s comment, made without a hint of irony.
I said goodbye to Brad at Heathrow two days later having spent the weekend with him, holed up in a hotel in Wimbledon. Brad’s lack of empathy had alienated him from pretty much everyone we’d met, confirming the old adage; people do business with people. There has to be trust. So, why had I devoted so much time to an expedition I knew was doomed from the outset? Well, to be frank, if had gone ahead it would have been quite lucrative. I was driven by FOMO – fear of missing out. I can’t help but feel similar behavioural biases also lie behind the rise of Bitcoin.
We’ll be looking at these influences in our January masterclass where we’ll be introducing Behavioural Economics. There are more details on our website and I’d be delighted if you were able to join us.
Richard Ross January 2017