Over the last few decades software has been eating the world and it is now coming for finance, law and the public sector — starting with programmable money. The societal impact of the underlying technologies and their adoption will have a ‘democratising effect’ on finance comparable to that of gun powder on violence or the printing press on scripture. Whatever digital currency systems users adopt will have severe consequences for our global societies. We have the opportunity to choose between different categories such as 1) digital fiat money (‘crypto’ USD, YEN, EUR) 2) corporate coins (Facebook Libra, JPMorgan Coin, Telegram TON) and 3) sovereign, open crypto currencies (Bitcoin, Zcash, Ether, Decred). This post shall help readers who are not deeply involved in the space to gain a high level understanding of the features and attributes underpinning each of those 3 categories. Let’s explore.
Benefits of cryptocurrencies over ‘old money’
There are different reasons for which the current monetary stack will be upgraded through digital systems. Those reasons are inherent to all 3 of the categories mentioned above and won’t be taken into account for further segmentation:
Natively digital — only digital monetary systems can be seamlessly integrated into the web’s protocol suite acting as sort of an http:// or https:// for money. The lack of internet native money and micro payments coming with it made advertising and user data exploitation become the internet’s major business model — coined as ‘surveillance capitalism’ by Harvard Professor Shoshana Zuboff.
Efficient & inclusive — digital money can be sent around the globe almost instantaneously and at near zero cost. That allows us to expand the offering of financial services towards users which previously were excluded from the legacy banking system due to economic inefficiencies (serving a customer with a net worth of $40 might be tough to justify for a bank).
Programmable, divisible, verifiable, durable: Digital money is highly divisible can be programmed in a way that payments are triggered based on certain conditions. That allows for the implementation of simple financial contracts which can be entered across the web without the need for trusted intermediaries or a judge enforcing them — they are self executing. A certain truth (of holding an amount of cryptocurrency with a specific key e.g.) can be cryptographically verified at any time. Digital money is very hard to fake and is as durable as our electricity grid and even more durable than the web itself since Bitcoin transactions can be streamed through satellites.
Not all cryptocurrencies are equal — why sovereign money outperforms corporate & fiat money
This passage describes some of digital money’s core attributes. Digital fiat or corporate money are unlikely to compete with sovereign money meaningfully in the long term.
Commercial & political neutrality: Issuers of corporate coins have a very high economic interest in launching and distributing their own currency. It starts with potential proceeds from selling their currency to private investors — Telegram sold TON worth $1.5BN to private investors, Facebook backed its currency project with $1BN coming from private investors and corporations like VISA, UBER, Mastercard, Paypal and others. They are charging each miner with a license fee of $10M to run one out of 100 miners. Even worse, corporations have a huge interest in harnessing the financial data of their users by establishing financial graph’s only their alliances are able to access — selling financial data to the highest bidder, business as unusual.
Nation states obviously have a systemic interest in people using their currency to maintain a place in the hyper competitive world of violence. The US is forcing countries in Africa and the middle east to denominate oil trades exclusively in USD in oder to keep their dominant position as the world’s global reserve currency for example. I’d expect China to plan similar moves in the countries depending on it economically soon.
Just like gold served as a politically neutral monetary standard during most of the 19th and parts of the 20th century only open and sovereign cryptocurrencies have the potential to do so in the future.
Voluntary adoption: Only sovereign crypto currencies are adopted voluntarily. Corporations with selfish interests will try to leverage their power through incentivising their business partners to adopt their corporate currency. Suppliers and partnerships which play by the rules will be rewarded, the rest will be punished financially what creates further network effects for the corporate coin issuer.
Similar pressure can be expected from nation states which are forcing their citizens to pay taxes in their respective currencies. Historically, the creation of counterfeit currency has always been sanctioned drastically as it directly undermines the power of whoever is in charge of debasing and printing money.
Nation states will (try to) ban corporate coins what will be comparatively easy to do — banning sovereign crypto currencies without a leader or corporate structure will be way more difficult. While externally enforced adoption might give fiat and corporate coins a head start in initial adoption it will be the most feature rich, secure, open and sovereign cryptocurrency becoming the web’s monetary standard.
Deflation or predictable inflation: The power to print money and to manipulate the monetary supply is inherent to nation states and is very unlikely to vanish in digital fiat money systems. Nation states are based on the monopoly on violence and controlling military forces to ‘defend’ their citizens against other nation states. As military machinery is expensive they might need to print some more money from time to time, for example during WW1 when several politicians expected the war to end within a few months as one of the parties involved should have gone bankrupt. They suspended the gold standard, printed money and destroyed 90% of the populations savings besides dragging them into a war nobody wanted. Only sovereign crypto currencies will have an inflation scheme baked into the protocol which would only be adaptable through a hyper consensus of all stakeholders.
Why a deflationary monetary standard might be preferable over an inflationary one cannot be discussed in full depths here. One of the positive aspects to highlight is that it won’t be dependent on debt and endless economic growth to work out sustainably. It might have a positive impact on wealth distribution as less financial bubbles might be created which are currently enriching the rich and making the poor poorer. Ray Dalio is referring to the US wealth gap as a ‘national emergency’ — I think it’s a global one and that we need to revive the patient.
Decentralised control: The term decentralisation is confusing and can mean different things in different contexts. Here it refers to the way how the state of the ledger is maintained by miners and how the rules of the system can be changed. For now it is unclear how nation states plan to launch their fiat coins technically but I’d assume they’d like to have full control over the underlying infrastructure. That is also true for most of the corporate coins — e.g. Facebook decided to let everyone interested in mining its coin pay a fee of $10M with a maximum of 100 entities. However that can also apply to allegedly open cryptocurrencies like EOS where only 21 miners control the ledger (which have been proven to collude already).
Censorship Resistance: Fiat and corporate coins won’t be as censorship resistant as the sovereign ones in a sense that everyone can transact with everyone at any time. We will continue to witness attempts to censor transactions to unpopular journalists, dissidents, foreigners or addresses which might have been used for criminal transactions in the past. Imagine the shop owner from around the corner has been buying some weed 10 minutes before you entered the store and you couldn’t transact with him to buy a lemonade because now your transactions gets censored.
Privacy: Corporations and governments have an intrinsic interest in not only monitoring their customers or citizens but to be able to read their minds, understand their desires, predict and finally manipulate their behaviour through surveillance. Narratives can be formed (Cambridge Analytica), purchases can be triggered. Only some of the open cryptocurrencies like Zcash, Monero or Grin offer different implementations of transactional privacy but are mostly unable to prevent full anonymity on the networking and routing level. Bitcoin is fully traceable in its current implementation what might change with lightning, schnorr signatures and other improvements though. Some wallets like Wasabi or Samurai are working on solutions.
Money’s competitive landscape
If one were to put some of the more popular currencies mentioned into a competitive analysis framework it might look like this — please take it with a grain of salt.
More than ever before humans will have a choice in how their financial future might look like. Instead of going through a bureaucratic voting process every 4+ years with almost no impact we now can continuously vote on our preferred financial system by literally putting our money where our mouth is. This will create competition for different technological and economic implementations of programmable money and will benefit all users around the globe. We can’t possibly know yet which system will win or if we are going to see a variety of implementations co existing based on context. Given the strong network effects of money, brand, current and future feature sets it’s very likely that Bitcoin is going to play a dominant role in this play.
Disclosure: The author is holding sovereign crypto currencies as an individual and with his business entity.