Going Beyond Bitcoin
How do you figure out what Bitcoin is worth? From the market? It’s hard for an normal person to know what to to do. On the one hand I read that this opaque marketplace is being manipulated by a single “whale” but on the other hand I read that Bitcoins will be worth like $1 billion each or something (which makes it all the more puzzling why merchants bother with Bitcoin acceptance, since no sane shopper would spend Bitcoins instead dollars if they are going to go up a thousandfold in the next few years).
In the long term, for Bitcoins to be worth something, someone has to want them for some reason. What will they want them for? Shopping? It’s too slow, it was never designed for real time payments. Shopping without censorship? I don’t think that the market for drugs on the Dark Web is big enough and evading capital controls can only go on for so long. Money laundering? Bitcoin isn’t anonymous enough for mass market criminals (as the FBI guys who stole coins during the “Silk Road” investigation and that BTC-e guy who got arrested in Greece have discovered). The Wannacry ransomware scallywags swapped their Bitcoins for anonymous Monero as soon as they could get them out of their wallets.
No, I don’t think uncensorability is going to be a good enough business to sustain the Bitcoin rally. Bitcoin will be superseded by more anonymous alternatives and while the computational overheads associated with techniques such as zero-knowledge proofs and homomorphic encryption are high at the moment, truly anonymous digital money will come slaloming down the Moore’s Law slope in the not too distant future.
If not Bitcoin, then what?
Of course, it’s entirely possible that while Bitcoin isn’t the money of the future, it is a secure platform for the money of the future. And boy do we need that money. In his book “The Money Trap”, Robert Pringle (a former editor of that well-known revolutionary pamphlet The Banker) writes that at the turn of the millenium “globalization reached the limits compatible with existing international monetary arrangements”. I agree. There is pressure for change and I think the current cryptomania gives us a window into the future of money.
In my book “Before Babylon, Beyond Bitcoin”, I explore the notion of private money set out by the noted “lateral thinker” Edward de Bono. He wrote a pamphlet called “The IBM Dollar” for the Centre for the Study of Financial Innovation (CSFI) back in the early 1990s. In it, he rather memorably said that he looked forward to a time when “the successors to Bill Gates will have put the successors to Alan Greenspan out of business”. Dr. de Bono was arguing that companies could raise money just as governments now do — by creating it from thin air. Now, if that notion seems to have resonance in age of multi-million dollar initial coin offerings (ICOs) then, well… that’s my point.
The idea of private currency as a claim on products or services produced by the issuer caught my attention back then, and continues to inform my thinking. For one thing, it makes economic sense. IBM, in de Bono’s example, might issue “IBM Dollars” that would be redeemable for IBM products and services, but are also tradable for other companies’ monies or for other assets in a liquid market. To make such a scheme work, IBM would have to learn to manage the supply of money to ensure that the monetary base and its capacity to deliver are matched and that inflation does not destroy the value of their creations. But companies should be able to manage that trick at least as easily as governments do, particularly as they don’t have voters to cope with.
It is easy to imagine how such a system would work. A start-up launches, and instead of issuing equity, it issues money that is redeemable against future services. So, for example, a distibuted file storage start-up might offer money in the form of megabyte days that are redeemable five years from now. In the early days, this money would trade at a significant discount to take account of the risks inherent in the venture. But once the file system is up and running and people like using it, then the value of the money will rise.
With tens of millions such currencies in circulation, constantly being traded on futures, options and foreign exchange markets, it might sound as if the “money” would be unusable because transactions would be unbearably complex for people to deal with. But as I wrote in The Financial Times, that’s not the world that we will be living in. This is not about transactions between people but transactions between what Jaron Lanier called “economic avatars“ (and those avatars might represent people or things).
This is a world of transactions between my virtual me and your virtual me, the virtual Waitrose and the virtual HMRC. This is my machine-learning AI supercomputer robo-advisor, or more likely my mobile phone front end to such, communicating with your machine-learning AI supercomputer robo-advisor. And our robo-advisors will be entirely capable of negotiating between themselves to work out the deal. In his pamphlet de Bono puts it quite nicely by saying that:
Pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction. And the supplier of that good or service would know that the incoming funds would be allocated to the appropriate combination of assets as prescribed by another pre-agreed algorithm. Eligible assets will be any financial assets for which there were market clearing prices in real time. The same system could match demands and supplies of financial assets, determine prices and make settlements.
He also wrote (this is more than two decades ago, remember) that the key to any such a system would be “the ability of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties”, an early vision of what we might now call the reputation economy that I explored in my previous book “Identity is the New Money”, where I noted that identities and credentials are easy to create and destroy but reputations are much harder to subvert — especially in the age of the blockchain — since they depend not on what anyone thinks but on what everyone thinks.
Now that the combination of mobile phones, social networks and shared ledgers makes the calculation of the value of a private currency cost-effective even for small transactions, the technology needed to deliver the Facebook Dollar, the Amazon Dollar, the Apple Dollar and the Microsoft Dollar (I insist that they be called Bill’s Dollars) is in place. And it’s not M-PESA or chip and PIN, but the technology of “tokens” that is already being used (some might say abused) in the current explosion of ICOs.
Now, the idea of use linking cryptocurrency coins or balances as tokens linked to something in the real world — like gold or file storage or a computer game — is hardly new and from the earliest days of Bitcoin people were using “coloured coins” to do this, but token technology really took off with the development of the ERC-20 standard back in 2015. ERC-20 defined a way to create a standard form of token in a “smart contact” on the Ethereum blockchain. Ignore the language here — they are not smart and they are certainly not contracts, they are a special kind of application that executes on a shared ledger (in fact, I prefer to call them shared ledger applications, or SLAPPs) — and just consider the token as a practical implementation of private digital bearer claims on goods or services, without the centralised clearing and settlement infrastructure that de Bono was imagining.
Right now, the world of ICOs is chaotic. Hundreds of millions of dollars are being raised in the Wild West of digital finance. Filecoin, a company that plans to monetise unused computer storage, has just raised $50m+ in token pre-sales to Silicon Valley investors (including Sequoia Capital and Andreesen Horowitz) and another $200m in a public token sale. That came not long after Tezos, which is developing a blockchain competitor to Ethereum, raised $232 million. Despite these huge sums, there is a lot of uncertainty in the space. The Securities and Exchange Commission (SEC) ruled in July 2017 that certain kinds of tokens are in fact securities and that transactions must regulated. This was hardly unexpected and I certainly think that the ruling was good news. Yes it is causing some disruption right now (one of the largest exchanges, Bitfinex, has just suspended US citizens’ trading in ERC-20 tokens that raised funds through ICOs) and yes some people will lose a lot of money and yes some people will end up in jail, but that’s what happens as we move from a Wild West to regulated growth and prosperity.
The regulation of this space is imporant. I think that ICOs are more of a picture of the money of the future than Bitcoin is. As I said in Before Babylon, Beyond Blockchain, tokens may make a real difference to the way the economy works. When the current craziness is past and tokens become a regulated but wholly new kind of digital asset, a cross between corporate paper and a loyalty scheme, they strike me as being something of an opportunity to remake markets in a new and better way.
One might imagine a new version of London Alternative Investment Market (AIM) where start-ups launch but instead of issuing money they create claims on their future in the form of tokens. The trading of these coins is indistinguishable from the trading of electronic cash (because there is no clearing or settlement) but there is an additional transparency in corporate affairs because aspects of the transactions are public. And while the company and observers may not know the beneficial owner of the coins (because the wallets are identified only by keys), the market will be set up to issue wallets after appropriate KYC. In the general run of things, transactions are private but where there is suspicion of wrongdoing the ownership can be exposed under appropriate legal conditions.
With reputations established as an immutable history of participation in transactions, good behaviour will not be gamed and bad behaviour will be on display. Market participants will be able to assess and manage risk, regulators will be able to look for patterns and connections. I’ll be able to see that your assets exceed your liabilities without necessarily being able to see what those assets or liabilities are. (This is one of the reasons why I tend to think of the blockchain as a regtech, not a fintech.)
This is a far more efficient way to manage things. There won’t be some giant IMF database that manages the new kinds of money. In this market, company perfomance rewards token holders by improving the exchange rate against other tokens. No coupons and dividends, no clearing and settlement, no hiding the number of tokens out there. The cost of trading these tokens will be a fraction the cost of trading stocks and bonds, which is why liquidity will seep out of existing markets and into these new and more efficient structures. Stephen McKeon, a finance professor at the University of Oregon, summarises this imperative by saying that assets of all kinds will tokenise because they will lose the “liquidity premium” if they do not.
Tokens won’t only be issued by companies, of course. In fact, I think that tokens that implement the values of communities may come to dominate the transactional space (think of the Islamic e-Dinar and the London Groat) but it will be the private money of innovative new enterprises that will prove the technology.
