The future $tate of Mon£y

A little meander around the state of money as a concept, and where cryptocurrencies fit in (or do not?)

As I continue to read on with the Blockchain & Digitial Ledgers book I’m getting a crash course in all things ‘money-related’. While I didn’t begin this chapter with much enthusiasm I have to admit — it's been far more thought-provoking than I expected.

What is money?…

• A means of payment, facilitating transactions involving the purchase of goods and services
• A store of value that can be used to transfer wealth from one party to another
• A unit of account that standardises the worth of goods or services.
• A call option e.g. allows you to buy things you want now or in the future

Money history in some bullets

• Since the beginning of time — we bartered for equal value exchange.. if you give me some meat, I will provide you with some fur—the bartering economy.
• 1200BC — First records of a physical currency — Chinese used cowry shells. The monetary economy is born.
• 7th century BC, the Lydians in present-day Turkey were the first to use coins made of electrum, a mixture of gold and silver. Later we see the Greeks and Romans follow suit in turn, and then later the Spanish to name a few famous coin peddlers.
• 618–907 AD century, the first paper money was recorded, in China again during the Tang Dynasty, it was backed by the government’s promise to redeem it for coins or silk.
• In the 17th century, Europe used paper-based money, backed by the gold reserves of their respective nations. The gold standard continued through the 19th and most of the 20th century.
• In 1971 the US ends the ‘gold standard’ and so began the issuing currency backed by a central government not backed by a physical commodity.

What about digital money/cryptocurrencies?

So obviously I’m reading about this as the foundation for understanding digital currencies, distributed or not. It would seem there is a strongly contested debate about whether the likes of Bitcoin are ‘money’, its volatility certainly makes it a risky one, and I suppose even though it's technically called a ‘coin’ it always seemed more like a stock.

I personally think the debates I’ve been reading have come from different camps of Central Bank Digital Currency (CBDC) supporters and cryptocurrencies.

A central bank digital currency?

In layman’s terms, a CBDC (Central Bank Digital Currency) is a digital version of a country’s fiat currency, which is issued and backed by the government or central bank. It operates within a regulated framework and is designed to provide a safe, secure, and efficient payment system. Having read this publication by GOV.UK around their ideas for a UK-based CBDC I’ve come to see some clear strengths for CBDCs when it comes to digitising money — a clear one that differentiates it from your online banking, referred to as a universal payment interface (UPI), is that digital money would replace physical money. You wouldn’t need a bank account to receive it, but it wouldn’t be anonymous like physical cash.

On the other hand, cryptocurrencies are digital assets that operate on a decentralized network, such as a blockchain. A central authority or government does not issue them, but instead, their supply is determined by mathematical algorithms. Cryptocurrencies might be used as a medium of exchange, a store of value, and a unit of account, and they offer greater privacy, anonymity, and decentralization compared to traditional fiat currencies.

This paper takes the position that banks are now entering the race with CBDC and with the trust they’ll garner they are likely to win the battle for digital currency. I’m sure I’ll learn a little more as I go, but the general distinctions I’ve noted are:

• Like a physical tender, their value is backed by a central government. I’m not overly clear yet what their consensus mechanic is to avoid ‘double pay/use’. Perhaps there will be a distributed ledger and they’ll borrow the lessons learned from the cryptocurrency market.
• Like a physical tender, you don’t need a bank account to hold the value of a digital coin and can use it to exchange goods and services.
• Unlike a physical tender, they won’t be anonymous like cryptocurrencies can be, although i think there are strong arguments for and against them. Laundering and crime feel like obvious ‘against’ complete anonymous tender.

Does that make cryptocurrency obsolete?

No, while some of this might feel like crypto will lose some ground I personally think it could be a GOOD thing for cryptocurrencies and the idea of money being something other than ‘my wallet of bank notes or my bank account’.
When people become exposed to it from a trusted source, like their national bank I think we’ll see more confidence in it as a technology and form of money.

I think we also need to look at the movements of bigger organisations like AMAZON who have vested interests in the technology for its transparency and ability to track the movement of stock and value exchange without needing to go through a central bank.

This write-up is worth a read — but i think they offer a very clear use-case

“ Traditional database technologies present several challenges for recording financial transactions. For instance, consider the sale of a property. Once the money is exchanged, ownership of the property is transferred to the buyer. Individually, both the buyer and the seller can record the monetary transactions, but neither source can be trusted. The seller can easily claim they have not received the money even though they have, and the buyer can equally argue that they have paid the money even if they haven’t.”

In development, we know integrations are just points of failure waiting to happen, and 3rd parties are the worst usually. So it makes perfect sense if they could track their existing goods/exchange internally via a blockchain. I’m sure as well it will result in far fewer disputes and fees for using bank services.

The key tenants of crypto-currency or more specifically blockchain and distributed ledgers which have a value that will continue to thrive.

Decentralization-Decentralization in blockchain refers to transferring control and decision-making from a centralized entity (individual, organization, or group) to a distributed network. Decentralized blockchain networks use transparency to reduce the need for trust among participants. These networks also deter participants from exerting authority or control over one another in ways that degrade the functionality of the network.

Immutability-Immutability means something cannot be changed or altered. No participant can tamper with a transaction once someone has recorded it in the shared ledger. If a transaction record includes an error, you must add a new transaction to reverse the mistake, and both transactions are visible to the network.

Consensus — A blockchain system establishes rules about participant consent for recording transactions. You can record new transactions only when the majority of participants in the network give their consent.

Concluding

I didn’t really have a point to make, it was just me writing things to try and cement my understanding of this landscape.

Future of cryptocurrencies — Early adoption of cryptocurrencies and the practical applications of the technology behind it is seeping into endless sectors. The decentralised, immutable records of transfer have many applications and it seems to me (and remember, I’m really really early in my journey) the technology will thrive but crypto-currencies might not be as they are today. I feel like the winners will be those with practical real-life value… rather than just a stock asset.

Is money going to go away? — I think physical fiats will die, maybe in my lifetime. Slowly replaced with digital currencies. That being said, I have a feeling that we’ll see people diversify the ‘money’ they hold. The winners might be the Amazons and the like, who can offer tangible benefits for owning and using their ‘digital money’. Which in turn helps them cut out a central authority and decentralise stock and commerce.