The School of Crypto Finance : A History of Money & Crypto Finance
A History of Money
Overview
Pre-Commodity
The history of money began in about 9000 BC in Egypt, when humans first began “bartering” to trade physical commodities. They bartered for “grain, wheat, and cattle which were common commodities used by farmers and other kinds of agricultural professionals of the time.” (source) Other earlier examples of money included “gift economies,” in which goods and services were given without any expected return, but rather emphasized good karma and honor for giving.
Commodities & Coins
The first case of commodity money came in 3000 BC, when Mestopotemians “developed a large-scale economy based on the shekel, which represented a specific weight of barley grain.” (source) The first known physical coin currency was created by King Alyattes in Lydia, now Turkey, in 600BC. Following this, many forms of coins began to develop and spread across the Mediterranean region. Gold and Silver coins were introduced during the Qin and Han dynasties in China and gained popularity.
Paper Money & The Gold Standard
Paper money began to be accepted as a commodity during the 11th century in China. Through his travels, Marco Polo brought the idea of paper currency from Asia to Europe. However, during this time, Florian, a gold coin minted in Florence, was the most popular form of currency across Europe. For this reason, it took a long time for paper money to catch on. It wasn’t until 1661 that the first banknote was issued in Sweden, and the benefits were quickly realized. Merchants and businesses realized how much more convenient paper money was compared to coins, which were heavy and could be easily stolen. Despite this convenience, paper money faced many setbacks because of how easily it could be counterfeited.
In the 17th century, England’s supply of coins were running low and the government was running out of money due to war with France. “This led the state to partner with the private sector to create the Bank of England-a private institution which had the legal authority to create money in the form of loans to the state.” (source) Eventually, the bank received interest on its loans as well, leading it to become the first-ever central bank. As the central banks, it has the power to “synthesize public authority and private investor interest to create a standardized and expandable currency for use in both the public and private sector.” (source)
Paper money continued to grow in popularity; therefore, countries began establishing the gold standard. The gold standard is “a monetary system where a country’s currency or paper money has a value directly linked to physical gold.” (source) Given that gold had been such a popular form of money for centuries, it made sense to convert paper money into a fixed amount of gold. England adopted the gold standard in 1816, followed by the U.S. in 1879. The gold standard was used until the 1930s, when it was replaced by fiat money. This term describes currency that is used because of a government’s order, or fiat, that the currency must be accepted as a legal means of debt payment.
Digital Currency
The first origins of digital currency trace back to 1860, when Western Union conducted the first electronic fund transfer via telegram. As technology developed in the 20th century, the first credit card, the cardboard Diners’ Club card, was introduced in 1950. Mobile banking was introduced in Europe in 1999 through the first wave of primitive smartphones.
Cryptocurrency
In October 2008, a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published by pseudonymous Satoshi Nakamoto, detailing Bitcoin’s underlying blockchain technology. On or about Jan. 3, 2009, Satoshi mined the first 50 bitcoins and started the Bitcoin payment network. The first ever transaction with Bitcoin occurred in 2010, when programmer Laszlo Hanyecz purchased a pizza for 10,000 BTC ($25 at the time). Since the introduction of BTC, thousands of new cryptocurrencies have emerged.
Philosophical underpinnings of Cryptocurrency
As outlined above, the current concept of fiat money and floating currency means that money has no value without a legal tender from the state (a central authority). Many believe that if the state controls money, they can utilize their governance of the financial system to exert authority and control.
The idea that underpins cryptocurrency is decentralization, providing the potential to disentangle the institution of money from the authority of the state. Blockchain eliminates the need for a centralized third-party to verify the authenticity of a transaction. This is possible because transactions are confirmed on the blockchain via consensus of a decentralized network of nodes. Anyone with a computer and an internet connection can participate in maintaining an immutable and distributed ledger, eliminating the need for one central authority to oversee transactions.
Privacy and anonymity are also key underpinnings of cryptocurrency. There are no usernames, logins, and emails associated with blockchain, which, unlike signing up for a bank account, requires personal details such as name, address, social security numbers, etc. With cryptocurrency, the identity of each user is encrypted, or concealed behind a complex and very secure code. In an era where personal information and data is becoming increasingly available to companies and governments, blockchain ensures ownership of your identity.
“ The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
— Satoshi Nakamoto
What Makes Money Money?
How can something be considered money? There are three main requirements:
- Medium of exchange : Money enables us to carry out trade and commerce. There must be an exchange rate (amount of money) established for the goods/services one is trying to secure.
- Store of value : Money needs to be worth something in order to use it. While it can fluctuate, money stores its value over time.
- Standard of value : Money must represent a standard value that everyone who uses it agrees upon. For example, the agreed-upon worth for a transaction in a country’s medium of exchange could be the euro, dollar or peso. With one standard value, we can measure and compare the value of all kinds of goods and services using one scale.
Cryptocurrency vs. Traditional Money
As Wall Street financial institutions like JPMorgan and Fidelity enter the cryptocurrency space, how does traditional money and the established financial system differ from this new kind of digital money?
While the debate continues about whether crypto will completely replace fiat or just be a digital version of it, the essential differences of crypto are indisputable:
The ledger is decentralized across a network of computers (nodes). No one person or organization owns these computers, rather everyone who participates “owns” the network. The blockchain eliminates the need for a centralized third-party to verify the authenticity of the ledger.
Where Crypto and Fiat Collide
Despite their differences, cryptocurrency and traditional money are part of a larger financial ecosystem that overlaps. While the popularity of Bitcoin soared following the 2008 financial crisis, when people lost faith in the banking system, it now bears many similarities.
Traditional investors are recognizing the potential of crypto, and companies are creating services that mirror the existing financial system. Also, the Securities & Exchange Commission as well as other government agencies are starting to recognize the need for regulation to protect against fraud and corruption.
Here are some areas of similarity:
- Exchanges. Cryptocurrency or digital currency exchanges are businesses that allow customers to buy and sell crypto assets. Just like in the fiat world, these third-party exchanges either charge a commission or transaction fee for trades. They exist as for-profit entities. Some popular crypto exchanges include: Binance, Coinbase, and Kraken.
- Custody. Crypto custodians like BitGo, Bakkt, DACC (Digital Design Asset Custody Company) offer a service in which they hold crypto assets on behalf of the owner. The reasons they exist are the same as why brokerages and other financial institutions hold traditional securities: to reduce the risk of loss or theft of assets.
- Regulations. As the crypto industry grows, financial regulators are beginning to take notice. Agencies like the SEC (Securities & Exchange Commission) and the New York Attorney General’s office, are creating new laws or enforcing and interpreting existing ones to better regulate the crypto marketplace. Regulators are also more clearly defining the different types of assets.
Go Deeper:
- Blockchain Privacy Explained
- Long-read: History of Money
- The history of money: from barter to bitcoin
- How Finance Began 4000 Years Ago, And Why Blockchain Will Completely Change It
- Best Bitcoin and Crypto Custody Providers, Rated and Reviewed for 2019
A History of Crypto Finance
In 2008, the world economy was a mess as the U.S. government spent billions of taxpayer dollars to bailout the banks. Since then a series of data breaches have exposed hundreds of millions of people’s private information. These two factors are key parts of the crypto finance ethos that led to Bitcoin and the many other cryptocurrencies and blockchain projects that would follow it.
Today, the community is still strongly distrustful of large entities and third parties accessing their data or censoring their transactions. While crypto finance seeks mainstream adoption, it’s also learning how to comply with regulators while protecting individuals. Decentralization is at the heart of crypto finance as a movement.
Decentralization vs. centralization
Decentralization aims to be democratic, sharing decision-making across a larger group of people. Decision-making includes more voices, but can make the process take much longer.
Centralization is a top-down structure where a single or very small group makes top-down decisions. A bank, for example, may limit who you can send money to and how much money you can send in a day.
Global Payments
In traditional finance, banks act as the middleman between transactions. Being the intermediary offers some protection to both parties (ability to freeze or reverse transactions), but it doesn’t come free. In exchange for using a banks services, the bank sets fee pricing and all the terms of working with them.
Cutting out the middleman creates opportunities for the global payment system. Borderless payments, for example, are a huge advantage created through crypto finance. Without the middleman, bitcoin for example, can be sent for a fraction of the fees centralized banks charge to send a SWIFT/wire transfer in a direct, person-to-person manner without needing a bank as intermediary.
Traditional finance laughed it off in the early days (Warren Buffet, Jaime Dimon), but they are taking note now. Many banks including Chase have a blockchain department. Others are using Ripple technology or creating their own to lower costs on international money transfers.
International Trade
Borderless payments also facilitate smoother transactions on the supply-chain where global manufacturers need both contracts and payment processing. Crypto finance offers a paper and cost reduction from removing middleman escrow services and contract providers. Using a smart contract, individuals and businesses can interact directly, forming a paperless agreement stored on a blockchain that releases funds as certain actions are completed.
An estimated 2.5 billion people don’t have access to banking services and most of them also lack a digital thumbprint, or identity. Crypto finance has a big opportunity if they can figure out how to reach this unbanked group.
Anti Money Laundering
Blockchain is a tool. It can shed more light on transactions, helping banks provide diligence against money laundering. Blockchain creates a real-time receipt of data on the payments. This increases the safety of information, so we can trust what was spent where, while helping financial institutions meet their obligations.
On the flip-side, crypto can hide transactions. People unfamiliar with crypto think all crypto is untraceable, when in reality, only a fraction of cryptocurrencies, namely privacy coins like Monero and ZCash allow untraceable transactions. Even though Bitcoin is fully auditable, its association with drug trading on the deep web still persists.
Global Politics
Foreign Relations, economic sanctions, and disaster relief are further areas where crypto finance carries potential to change the status quo. Blockchain use cases for international relations have stayed mostly theoretical but recently blockchain charity, Bifrost partnered with MakerDAO for a blockchain-based foreign aid payments to send money to crisis zones. Here, the blockchain creates a publicly verifiable trail of how money is distributed, discouraging corrupt actors from dipping into funds.
Cybercrime Security
Crypto may be able to provide transparency, but it has a seriously bad reputation to overcome. Crypto is attributed to tripling the amount of cybercrime committed since 2017 , mainly as a result of exchange hacks.
What’s Next for Crypto Finance?
Crypto finance can help the global economy by connecting the globe with borderless payments, digital identity, and supply chain solutions for businesses, governments, NGOs, and banks. Without stable cryptocurrencies and payment channels, porting to an all digital system of cash could wreak havoc on the global economy.
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Originally published at https://www.dittopr.co.
