When people debate whether blockchain-based crypto assets will gain mass adoption, they overlook consumer demand for the most efficient form of currency possible. Today that currency is cryptocurrency, as demonstrated by the evolution of currency and transaction efficiency in the United States.
The Bank note
Prior to the formal financial system in the United States, states, municipalities, private banks, railroad and construction companies, stores, restaurants, churches and individuals printed their own form of currency. During the peak of the free banking era, over 8,000 different forms of money was circulating within the United States by 1860. Consumers refused to carry and protect large sums of gold coins.
The Federal Government Responds
The Federal government had to control this invasion of currencies. Due to lack of regulation, many banks and companies were not able to meet their financial obligation to customers. These institutions were issuing far more notes than they had in reserves, many of which packed up shop and ran away when there was a run on the bank. Such institutions were dubbed as “wildcat banks” because there was no promise the bank note had any value. In 1863 and 1864, the National Bank Act was signed into law, setting a national banking standard. The act successfully established a national currency backed by US stocks and set strict banking standards for institutions. The act was successful, by 1865 most state banks had either received national charters or collapsed, removing wildcat banks in the process.
Efficiency 1: The Credit Card
After 80 years, consumers began refusing to carry and protect large sums of fiat dollars. In 1946 the first credit card was invented. Credit cards offered significant advantages over all forms of money: they’re pocket size, easily portable, relatively secure and have no intrinsic value in themselves.
Efficiency 2: Digital Payment Applications
With the introduction of mobile computing, why carry around a card when you can pay with an application on your mobile device? This is where one can observe consumer demand for a digital currency really take off. The only problem is the currency isn’t truly moving. Current digital payment applications have simply become more efficient at tracking IOUs between consumers and banks. This process has allowed for a faster settlement time, although still takes two days for the bank to settle the transaction and update balances.
On October 31st, 2008 the bitcoin whitepaper proposed a peer-to-peer digital cash system. The sole purpose of bitcoin was to create a digital ledger of transactions that is trustless. Therefore, transaction history on this ledger will always be 100 percent accurate and participants can trust what was put on this ledger to be valid. Bitcoin has proved the ability to digitally hold and track assets in an immutable fashion, removing the costly and time consuming process conducted by third party institutions.
With the birth of Ethereum, smart contracts and an ERC20 standard of token, issuing your own cryptocurrency became easy. As of today, coinmarketcap.com is tracking over 2,000 different digital currencies. Many of these currencies are valued based on speculation and trust in the issuing company. Such trends are near identical to the free banking era of the 1837–1862. These currencies are non-standardized, still require bartering and debate over true value of the currency, and they are extremely illiquid. This makes transacting in crypto still quite cumbersome for consumers.
Standardized 1:1 Peg
The introduction of the Gemini 1:1 peg on September 10th 2018 was simply a response to market demand. Bitcoin proved the distributed ledger model, now Gemini is bringing it mainstream. The same way the United States government standardized commercial banks in 1864, the United States is allowing for the Gemini 1:1 USD token only under strict banking standards.
As consumers demand real time transaction data, instant settlement and countless other efficiencies, more institutions will be issuing 1:1 cryptocurrency pegs for the United States Dollar. Like Gemini, these institutions will be held to strict banking standards, but each token will only be redeemable at the respective institution. This will become a problem due to the fact that the national banking systems digital infrastructure will not have the ability to interoperate with digital currencies, only to regulate them vicariously through fiat gateways. When consumers demand only a digital currency, the United States will be forced to standardize a national cryptocurrency backed by the United States Dollar to satisfy and protect participants within the United States economy.
The United States is in the free banking era of the cryptocurrency. The United States government must take action the same way it did in 1864. Many companies are attempting to tokenize every aspect of their business, issuing unregulated currencies only backed by their promise to sustain the value of the token by gaining adoption. Companies often claim the tokenholder will have rights to the underlying company or asset although this is not a legally binding agreement. These companies are doing the same thing that wildcat banks did during the free banking era. The United States government needs to enact legislation to protect citizens against these bad actors while still being able to utilize the new efficiencies of cryptocurrency.
In-store purchases take up only 40 percent of digital transactions. This implies that 60 percent of transactions are made via electronic portals linking the buyer and seller. With the mass adoption of mobile devices and automated payment solutions, consumers are relying on machines to keep track of millions of digital transactions. As we progress deeper into this digital age, a way to record these transactions needs to be implemented to ensure no bad actors manipulate transaction data or balances. Utilizing a national cryptocurrency is inevitable because it is the only way to provide the protection and efficiency in a currency that consumers demand.