The Future of Electronic Money
Humans change their money every century or so, (see the Bitcoin Standard and the History of Money) and such change does not typically happen with a big bang, it is more of a gradual process with the new system replacing the legacy system over decades.
For the purpose of this paper, the starting point of the existing money system is the Bretton-Woods conference in 1944. The most significant change to this system was the removal of the gold standard by President Nixon in 1971 and this led to the slow motion unravelling of the system, which we are still witnessing. The start of the new money system was the release of the Bitcoin whitepaper on 31 October 2008. So we have today the fiat (meaning ‘it shall be’) based system and a crypto (short for cryptography) based system. These two systems are very different, but both are seeking to achieve the basic functions of money — Store of Value — Means of Exchange and a Unit of Account.
Nothing is as simple as the old and the new system and we are not going to flip from one to the other anytime soon, there are lots of in between times.
Imagine the international and domestic money/payments system in the year 2070. By then these old and the new systems will have merged and be interoperable, offering governments, organisations and individuals many more money choices than they have today. But what will this look like ? This paper sets out one possible outcome.
Electronic Money Taxonomy
Part of the purpose of this paper is to propose some taxonomy/nomenclature for the different types of electronic money that are emerging (adding I hope a bit to the taxonomy work by Chris Burniske and Jack Tatar). It is also important to understand the meaning of these words for this purpose of this paper.
I use four characteristics to arrive at four types of electronic money.
The term ‘Person to Person’ (P2P) means transfer of value directly between two parties without going through a third party.
If the transfer path is not P2P it is assumed to be via a 3rd party usually a bank.
The term ‘Open Code Monetary Policy’ means a monetary policy which is embedded in open source computer code.
If it is not a Open Code Monetary Monetary Policy it is assumed to be a monetary policy managed by a trusted independent Central Bank or some other centralised group.
The term ‘Permissionless’ means anyone can join or use the system without permission of going through a identification process,
If it is not a Permissionless system it is deemed to be a system needing permission to join or use.
Level of Privacy
The term ‘Private’ means transaction and balance are completely invisible to anyone other than those parties involved with the transactions.
The term ‘Anonymity’ means transactions can be tracked and balances are visible, but the parties behind the accounts are not readily identifiable.
From these characteristics I define four types of electronic money being : Digital Fiat; Cryptofiat; Cryptocurrency; and Cryptocash. These are defined as set out in the below flowchart.
Privacy v Control
Confirming the identity of a person without compromising the privacy of that individual is one of the greatest and most important unsolved issues in the digital age.
The Know Your Client (Citizen) (KYC) and Anti-Money Laundering (AML) laws are designed to protect society from bad actors by cutting off access to the money they need to fund their activities. These laws are an invasion of privacy justified on the greater good argument for a safer society. See here for a discussion on Blockchain and privacy issues.
In democratised economies the State outsources collection of transactional data to the Banking sector, the data is then passed to State departments who analyse and flag data to the security apparatus of the State.
The effectiveness of this system is questionable, I have no intention of delving into the massive money laundering cases that have been brought against the World’s largest banks, a simple google search will reveal all if the reader is interested.
The many failures by Banks to enforce existing AML laws has led to Governments doubling down on the laws, making them even more pervasive, such as laws to ban cash altogether.
Governments are fond of saying that Bitcoin is used to fund terrorists. At the same time I see many Governments considering blockchain technology as a wonderful tool to administer and enforce AML laws, and perhaps control other aspects of citizen life.
The Nation State Arms Race for a National Blockchain and Cryptofiat
The second half of 2019 has seen the start of the race to be the first major economy to issue it’s sovereign currency in digital form and to harness the potential of blockchain technology. I refer to this as the blockchain wars.
Initially (and still today in many cases) central banks have derided Cryptocurrencies as ponzi schemes and frauds. Now that they understand the underlying technology they are racing to be the first to harness the power of the technology for their own currencies. Governments, regulators and central banks are now having their ‘blockchain not bitcoin’ (first heard in 2014–16) moment.
The most openly ambitious nation thus far is China. President Xi Jinping announced in October 2019 that the Peoples Bank of China will be aiming to issue a CYN Cryptofiat as soon as possible and that the whole of Government will be adopting blockchain technology wherever practical.
Closely behind China is Russia. Vladimir Putin sees blockchain as a State level security issue and has made many speeches setting out his intentions for Russia to dominate this space see here.
The Facebook coin Libra has been a big part of enlivening the awareness of this technology in parliaments and central banks around the world. No Nation State has the ability to put Cryptofiat into the hands of over 2.7 billion people in the way that Facebook could. Facebook has overtaken newspapers, televisions, radios, parliaments and all other traditional platforms to become the most powerful uncensored public opinion shaper the world has ever seen. It also holds more person data on human beings than any Nation State. This has woken US Congress. At a Libra hearing on the matter in October 2019, Maxine Waters made the following statement :
‘…Your claim to promote freedom of speech does not ring true, Mr. Zuckerberg. Each month, 2.7 billion people use your products. That’s over a third of the world’s population. That’s huge. That’s so big that it’s clear to me and to anyone who hears this list that perhaps you believe that you’re above the law, and it appears that you are aggressively increasing the size of your company and are willing to step on or over anyone, including your competitors, women, people of color, your own users, and even our democracy to get what you want. All of these problems I have outlined. And given the company size and reach, it should be clear why we have serious concerns about your plans to establish a global digital currency that would challenge the US dollar. Maxine Waters — Mark Zuckerberg testified before congress today on October 23, 2019
It is safe to assume that authoritarian governments will not be adopting the uncensorable, permissionless and private aspects of the technology. They will be seeking to increase control over their economy and their citizens by increased control over their citizens money. I expect however that our great democracies will also not adopt the egalitarian and democracy enhancing aspects of the technology and that it will be a race to see who can rollout a permissioned, censorable, centralised Cryptofiat.
However, public blockchain technology is already too far advanced for Nation States to close it down. I expect the public v private blockchain ecosystems to develop in a similar way to the intranet v internet ecosystem. Eventually the attractiveness of open systems gives way to closed controlled systems and ‘walled gardens’.
Mark Zuckerberg in defending the Facebook/Libra initiative put forward the case that the US Govt should encourage such technologies at home in competition with China, Russia and others who are racing to become dominant.
De-Dollarisation of Global Trade
Domestic control over the money of citizens is one driver for development of Cryptofiat. Another is the opportunity to displace the USD as the World’s base currency. The theory being that by making a State’s money (for example the China CNY) more accessible and easy to transfer, it could displace the USD as the default global currency. There is a great opportunity for this to happen in the third world economies (where USD notes can be used as the default local currency) and countries engaged with the Belt and Road initiative (where China may insist trades settle in CNY Cryptofiat).
Russia and Europe also would like to see a reduced reliance on the USD and some choices for global settlements, for example the EUR Cryptofiat and the RUB Cryptofiat. In short, once all G20+ countries have issued Cryptofiat, the currency competition between Nation States will be significantly enhanced and may also become more transparent. This will lead to better pricing of Cryptofiat relative to each other, this may well increase domestic economic efficiency. But in the end, we will still have one country’s Cryptofiat being the default global currency.
By 2025/30 I can see Balance Theory ‘the enemy of my enemy is my friend’ starting to change the way States view Cryptocurrencies. In this context the theory would work as follows :
- each of the G20+ nations do not want another nations Cryptofiat to be the default global currency;
- each of the G20+ nations do not like Bitcoin or other Cryptocurrencies; but
- each of the G20+ nations would prefer Bitcoin or other Cryptocurrencies to be the default global currency over that of another States’ Cryptofiat.
The idea is to use a Cryptocurrency (BTC for example) as the base against which Cryptofiat’s are valued. So the parings would be BTC/USD, BTC/CNY, BTC/EUR, BTC/RUB etc (these parings already exist in the crypto markets).
There are many attractions to this, the main one being that none of the G20 members can control the value of BTC, they can only control the value of their Cryptofiat by using money supply and the strength of their domestic economy. This is not far fetched. The current Chair of the ECB, Christine Lagarde has said as much at various times when she was the head of the IMF, see here.
Andreas Antonopolos states that Bitcoin cannot be stopped by any Nation State, and he may be right technically, but it can be made illegal? The interesting question that flows from this is…would a prohibition on Cryptocurrency be enforceable, or would it have the same issues as the prohibition on alcohol. The answer is we do not know. But on balance it seems that a prohibition would unlikely be successful on a global basis and, like alcohol, an attempt to prohibit may accelerate adoption.
The answer to the privacy v control issue mentioned above will be found in artificial intelligence and machine learning technologies that will scan public networks for nefarious activity. Robot generated but time limited Search Warrants will open windows in an otherwise private networks to explore leads and investigate suspicious activity.
Biometric identification technology together with de minimus standards will allow the previously unbanked or undocumented to join public networks and access Cryptocurrencies, Cryptofiat and Cryptocash and indeed any tokenised assets or non-fungible tokens.
Battle for the Hearts and Minds of Crypto savvy Citizens
The Millennial generation are growing up digitally native, they have a peek into the blockchain age, but Generation X will grow up crypto native and this will be due on part to government and enterprise adoption of blockchain tech over the next decade.
At the same time the Nation State arms race is happening developments in the enterprise and retail level Cryptocurrency and Cryptocash space are continuing with great speed. Speed which thus far has outrun States. This will continue.
By around the year 2025/30 all central banks will have issued their Cryptofiat, they will compete with each other as they have always done, albeit in a more transparent environment. The user interface issues with Crypto will be well and truly solved. Crypto wallets will be as ubiquitous as mobile phones and point of sale machines everywhere will accept all types of Crypto as a matter of normal business.
So people will have the choice and they will be able to watch the value of currencies in their wallet go up and down in value 24/7. The choice people have at this point is not just Cryptofiat against Cryptofiat but Cryptocash/Cryptocurrencies against Cryptofiat and the whole range of Cryptoassets.
The choice will not just be about the exchange rate (which should reflect the value of underlying economies) between currencies but also the yield that can be enjoyed by depositing the currencies. In the case of Cryptofiat this would bank or commercial bond interest rates, in the case of Cryptocurrencies it would be via lending or staking Cryptocurrencies. Indeed people have that choice today (November 2019) and the yields are very different. Cryptocurrency yields average in the two digit range, while the fiat world has negative interest rates.
I have no doubt that Cryptofiat will exist alongside Cryptocurrencies. Humans are tribal in nature and love their country, I do not see this changing. But people are also self interested and there will be a strong pull towards money that retains it’s value and offers a healthy yield. This increased competition will put pressure on States to manage their nations responsibly.
The Year 2070
The year 2070 is too far off…I am hedging. The development of the internet, the adoption of mobile phones and the growth of the FANG companies, all of which has happened in around two decades is an example of how fast things can change. And change is coming faster and faster. A more realistic timeline is 2040 or earlier. By then I predict the following :
- all G20+ countries will have issued their Cryptofiat and it will be readily available to citizens (some Nation States may restrict this);
- the G20+ countries will continue to control their monetary policy as they have done since this concept was introduced (but with much greater transparency and speed);
- global trade will largely be de-dollarised and the extent it is not it will be a USD Cryptofiat. The most popular currency for global trade will be one or more Cryptocurrencies (imo BTC, ETH and Hbars);
- any individual with a mobile phone will have access, via their phone’s crypto wallet, to all Cryptofiat, Cryptocurrencies, Cryptocash and any form of Cryptoasset; and
- moving from Cryptofiat to Cryptocurrency to Cryptoassets will be as seamless, immediate and cost effective.
It may seem that I am being accommodating by concluding that ‘everyones a winner’ : all forms of money will survive; all blockchains will work; and all people will have access to better forms of money. But I believe that this is possible. If we use the internet as a comparison, we have hundreds of internet service providers, we have public access and interoperability and we have over 50% penetration. The internet is a fairly good thing. Web 3.0 (as blockchain tech is sometimes called) will be far better than the internet, but I am an optimist. I guess we shall see.