On the evolution of money: compatibility and plurality
This theme isn’t new. Now and again it pops up more prominently, when some underlying changes are active in the market. I feel like such a shift is currently happening with digital (or »crypto«) currencies and, hence, there is a lot more writing on this topic. Not to spend too much on this subject, there are two aspects that I want to explore in more depth. One is what I call Backwards compatibility. The other is Plurality of money. We will discuss both in more detail below but let’s start with the basics.
1. Barter money: At the beginning there was no money. People engaged in barter, exchanging merchandise for merchandise, without certainty of equivalence in value. While both transactors received something that was more valuable to them, the clear flaw was that one needed to find a good match that wanted what I had and vice versa. Hence, the terms of trade varied wildly.
2. Commodity money: Because finding the right transaction partner was much easier than for others, some commodities naturally evolved as transaction bridges or for value estimation between goods that were not frequently traded. Examples of this were cattle, poultry or salt that were used to facilitate transactions. This softened some of the price volatility in trading but also made trading more frequent. Both had a positive impact on economic development.
3. Metallic money: As civilization progressed it became fascinated by little shiny things they could mold, bend, take home and store. This gave rise to metallic money in the form of gold, silver and bronze. Not only was it easily portable, it was also a great store of value (vs. e.g. cattle). Once we could accurately determine the weight and purity, this made transactions even faster and value determination more accurate.
4. Paper money: For all its shine and appeal, metallic money had two major drawbacks. It was difficult to make and dangerous to transport. Its introduction marks the beginning of the monetary system as we know it today. In fact, today it still represents the most frequent form making payments around the world.
5. Credit money: Its emergence took place almost side by side with that of paper money albeit in a more dematerialized and abstract form. The most notable example of this group are checks that were initially mainly used for individuals to perform banking operations. Later it gained popularity die to its portability and simple use. Most significantly, it made larger transactions easier to execute and more secure.
6. Plastic money: Yes, our beloved (or cursed) credit and debit cards. They are very portable and fit into every pocket. They aim at removing the need to carry cash and are more resistant to severe weather than checks. It marks an important step in making cash digital but high fees are somewhat of a problem. Also, the security is much better due to chip and pin technology, when compared to previous evolution stages.
7. Digital money: Money. Anytime. Anywhere. While generations 5 and 6 are already fairly digitized in today’s form, they are still marked with heavy IT systems that are heavy, centralized, expensive to maintain and difficult to navigate. Enter blockchain and cryptocurrency.
Now we have the basics down, so let’s look at the two points mentioned in the beginning.
Backwards compatibility:
Whenever a new form of money evolves, it takes some time for it to be adopted. This is completely natural. People are anchored in their habits and it takes time for everyone to start using new things. Or new forms of money in this case. The good thing is that with an ever-faster moving and more digitized world, also the adoption curve of new digital things becomes steeper, i.e. adoption rates for digital money should increase quicker than was the case with going from metallic to paper money or credit to plastic money.
However, because initially most people still prefer “the old ways”, while “early adopters” are in the minority, early adopters need a good interface to spend in new ways with old infrastructure. Plastic money pioneers needed the ATM to withdraw paper money that they could spend, where plastic was not accepted yet. Similarly, digital money pioneers need existing POS compatibility to spend their currencies on crypto technology. Or sometimes even an ATM to travel back in time even further.
This is why Sofitto has developed the world’s first mobile-native hardware wallet for digital assets in the form of a standard-looking banking card. This ensures full backwards compatibility with existing legacy infrastructure (ATM, POS), while providing a full mobile experience with our mobile wallet for users of digital money.
Plurality of money:
We all know very well that we usually need to exchange currency, if we want to spend abroad. Either we do explicitly, when we exchange cash for cash. Or we do it implicitly, when we withdraw money at ATMs or just swipe our cards in a different country. The exchange in the back is then done by the card issuer and some additional intermediaries. Digital money and digital assets are not different in this respect.
Of course, not all cryptocurrencies and tokens can (or even should) be viewed as money-replacement. But a few fit this category pretty well. And just as there are numerous fiat currencies issued by all the different countries, there are numerous cryptocurrencies that people want to use or spend on various things. What their users want is a way to make parts of their crypto holdings usable on daily level. Just like spending fiat money. People want to invest some, just like buying stocks, bonds or other financial products. And some they want to spend, just like spending Euros or Dollars or any other currency.
This is not an article about how cryptocurrencies will replace fiat currencies. Rather, that they will coexist and that also fiat currency will slowly drift towards distributed ledger technology that underpins crypto. In a recent survey by Quartz[1], more than 40% of participating central banks were planning to use blockchain technology within a decade and over 20% were planning to use the technology within 2 years. And the longer it takes for Central banks to offer real digital cash, the more alternatives there will be on the market that are issued by private providers, providing speed, security and transparency of blockchain transactions.
A recent report by the European Parliament on Virtual currencies (VCs) and central banks[2] even highlighted that “VCs have the potential to serve as fully-fledged private money” and that one “cannot exclude the possibility that a number of users and transactions will increase to the extent that VCs will become a fully-fledged substitute of sovereign currencies in the future”. To be clear, the report does not predict a full substitution of fiat money for VCs to form the base scenario. And I agree with that. However, I strongly believe that the share in global transactions that are carried by privately-issued VCs vs. “official” digital money on distributed ledger technology will largely depend on the speed at which digital money is implemented around the world. There is no doubt any more that there is a real market demand for digital cash.
This is another reason why we at Sofitto are blockchain agnostic. We offer users the ability to securely store and pay with any currency of their choice, as long as it is issued on distributed ledger technology. We also offer merchants the ability to get paid in any currency but without the need for additional physical payment infrastructure. Any NFC-enabled mobile phone can be used to receive payments securely and instantly. We also offer existing financial intermediaries to supercharge their blockchain implementation with our back-end components that allow them to get on the digital money train running on blockchain rails.
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[1] https://qz.com/index/1085549/central-banks-are-getting-closer-to-issuing-their-own-national-versions-of-digital-currencies-like-bitcoin/
[2] http://www.europarl.europa.eu/cmsdata/149900/CASE_FINAL%20publication.pdf
