Money is a technology (II)

Currency and Cryptography

Having said in Part 1 that the iconic technology of money is the plastic card, right now the iconic money of the future seems to be cryptocurrency. Spurred on by the widespread interest in Bitcoin, there are many people looking at the concept and wondering whether cryptocurrency, money that depends on cryptography rather than the belief of a community, might be a feature in the emerging money landscape. There are, of course, cryptocurrencies other than Bitcoin and cryptocurrencies yet to be invented, but if we use Bitcoin as the case study then it seems the jury is out. Stefan Brands, a leading cryptographer and a digital currency pioneer, calls Bitcoin “clever” and is loath to bash it but believes it’s fundamentally structured like “a pyramid scheme” that rewards early adopters, a charge levelled by other observers of the financial markets.

Whether this is true or not, there is no clear evidence that Bitcoin (despite the media attention) is actually being used at all. While the public debate around Bitcoin has, from the earliest time, focused on the supposed anonymity of the payment system and therefore its use for black market purchases, the Federal Reserve’s detailed analysis of data from the Bitcoin system showed that it was barely used for payments for goods and services at all (let alone for guns and drugs), and further that the pattern of circulation of Bitcoins and the dynamics of the exchange rate are consistent with low usage of Bitcoin for retail transactions. So despite the widespread interest, Bitcoins do not seem to be gaining much traction in the “real world” of payments and I do not see much reason to imagine that they ever will. This is not to say, as noted, that the blockchain will not.

‘Money is vanishing into phones. The experiments are about to begin’.
Source: Dave Birch.

Bitcoin is not the future of money, and the future of money is not Bitcoin. Why the interest then? My conjecture is that it points to a latent demand for change. The interest isn’t specifically in Bitcoin, to my mind, but rather in the feasibility of an alternative to the state-issued, interest-bearing fiat currency money system that has been in place for the last forty years. The post-industrial economy needs a new kind of money, not one devised by representatives of the status quo, and it won’t be the single galactic currency of science fiction imagination (we can’t even make a single currency work between Germany and Greece, let alone Ganymede and Gamma Centuri) but thousands, even millions, of currencies.


Social currencies

I would like to add a further aside here about how the nature of decentralised digital money, whether on a blockchain or a SIM, might impact society. In the post-modern framework of Umberto Eco, I think that society should be asking its technologists not to build virtual currency, but hypercurrency: Not a digital version of money as it currently is, but a digital version of money as it should be. We should be able raise the bar higher than an electronic simulation of the plastic simulation of the paper simulation of money that we have now. This means a currency that embeds community values in its implementation. A good example might be privacy, as mentioned in the discussion about Bitcoin, but it also means currencies that embody different values, which again (to my mind) points toward overlapping real and virtual communities as the currency issuers.

The idea of money with values takes us into new realms. Reflecting on the 17th annual Consult Hyperion Tomorrow’s Transactions Forum, held in London in March 2014, Wendy Grossman said that

We are moving from money we understand to money that understands us.

I was very taken with this encapsulation of a couple of thousand years of monetary evolution from coins made from precious metals to computations across the social graph. We no longer have money that the normal, typical member of society can understand. The person in the street doesn’t know where money comes from or how it works. I know for a fact that some of them still think that there is gold in the Bank of England that sits behind each banknote, something that hasn’t been true for nearly a century. Most people don’t know how a credit card  transaction gets from the shop to their statement. They may think about money, stress about money, celebrate money or despise money, but the general public don’t really understand how this crucial economic technology actually works and they don’t really care.

Right now, we have money that observes us. Barclays, Visa, MasterCard, Amex, Simple, Loop, Amazon – they all know what I bought yesterday, where I bought it, when I bought it, how often I bought it and so on. But they don’t know why I bought or who I bought it with. Thanks to social networks, they soon will (!) and in the future, as we will discuss later, there will be no need for the intermediary of money at all. Thus hypercurrency as a vehicle for Szabo-style synthetic currencies that could be used directly in contracts in the function payments ought to be the science fiction writers’ new exchange paradigm. No more “that will be ten galactic credits, thank you”, more “you owe me a return trip to Uranus and a kilogram of platinum for delivery in 12 months”. This reinvention of a turbo-charged form of barter may, at first, seem to be a step backwards but moving from cryptography to paleo-future to complete the narrative shows it is not.


The Paleo-Future Perspective

I am always curious to see what people used to think about the future of money and, where they were wrong, always curious to understand why they were wrong. A line of thought led me to an October 1998 article in Discover magazine that asked a number of prominent thinkers to speculate on the future of money. I read the comments that Jack Weatherford made back then with great interest. Professor of Anthrolopology at Macalester College, he said that

If we take the long view of history, money was not necessary until very recently. Soon — though not in our lifetime — the money phase of history will pass, and money as we know it will be become one of those quaint curiosities of the past

Weatherford, author of another very good history of money, went on to say that

Already cash has become the domain of poor people and poor nations.

He notes that with the many new forms of money visible, the difference between barter and money systems will become blurred. Hence his conclusion that the digital money world of the future will look a lot like the neolithic world economy before the invention of money, a conclusion reached long before the mobile phone reached the furthest corners of the Earth and more than 100m Africans took to Facebook.

I was also very interested Paul Krugman’s comments. Then-Professor of Economics at MIT but now at Princeton, made four particular comments that deserve exploration here. Krugman said that there will be a distinction between electronic cash and electronic money because of the need for small transactions where neither the buyer nor seller want the buyer’s creditworthiness to be an issue.
 I used to think that this was true, but I don’t any more. The “internet of things” and always-on connectivity have eroded the cost differential between the two.

He went on to say will not be a universal currency for a long time. There is a big advantage to separate currencies providing price stability in different parts of the world.
 I don’t think there will be a universal currency ever. It doesn’t make sense in economic terms, let along technological or social or political or business terms.

He further said corporations will not issue their own private currency. 
I’m not so sure about this. If there are going to be more monies than fiat currencies, the corporations are obvious issuers of transactional medium of exchange currencies and companies and their customers are a kind of community that has incentives to share a currency. Whether corporations can deliver a store of value is harder to predict, given that they don’t (in the great scheme of things) last that long.

Finally, Krugman said that what everyone wants is an anonymous, reliable means of exchange; given a chance, they will always prefer one backed by a government. He observed

One can imagine that a system of purely virtual money might be subject to severe instability.

I can’t. And I think a lot of people say they want anonymity (when what they really want is privacy) only because they haven’t really though it through. Do we really want to live in a society where transactions are anonymous? That is not obvious to me. A society where all transactions are anonymous is a society that allows the rich and powerful to act with impunity, a society that positively encourages corruption. This is why I specifically use the word “private”. As I said before, that might well be one of the key characteristics of a currency in a community that I would want to belong to. And we will want the private payment systems of the future to be built from open source and assembled under public scrutiny to see that the “privacy dial” is set at a democratically-accountable level. Hence the warning from Robert Sapolsky, still Professsor of Neuroscience at Stanford University, who said that

The very perfection of the identification system will guarantee urban myths about guys bankrupted when some techno-schnook stole their pheromone signature and racked up huge bills buying antique CDs for the Madonna centennial.

This was echoed by Jem Bendell when he wrote for Open Democracy on the “weaponisation” of money. We must, in responding to these valid concerns, ensure that society makes some informed decisions about the path through technology roadmap. Fortunately, this roadmap is clearer than the social roadmap, despite the accelerating pace of technological change. Talking of new technology, Marvin Minsky, then Professor of Computer Science at MIT and now at the MIT Media Lab, said that

With fast computers and huge memories, we could have a nonlinear database that would better understand what each person has and wants. Then, by using complicated game theory-related computations, it might turn out that in general everyone would get more (in terms of their personal values) for the goods that they are willing to “sell”.

There is a link between Minsky’s deductions from the technology roadmap and Weatherford’s comments as an anthropologist, but we’ll come back to those later. Minsky, incidentally, goes on to make some comments about the relationship between money and taxation.

Taxes will be lower because of the vast amount of uncollected tax today.

Given that somewhere in the region of a fifth of the economy in developed countries is untaxed and outside the formal financial system, the tax burden falls pretty heavily on us remaining wage slaves, and as the post-crisis tax burden climbs to the point where it falls off the demographic cliff, so will the calls for reform grow. Minsky went on to reinforce my observations above by saying that:

The system of electronic currency will never be acceptable unless the laws protecting privacy are greatly strengthened.

With these final building blocks, then, we have an outline of a plausible narrative for the future of money: distributed, private, community-centric and in the long run set to vanish. The final question: when will this narrative begin to unfold?


Weak Signals for Change

What is the first step to take us on the journey to the next generation of money? It’s the dematerialization of money, the disappearance of notes and coins and the emergence of wholly digital currencies. These may be cryptocurrencies, but I don’t think they will be – for the time being at least.

And there is a trigger, because of the potential for Greece to pull out of the Euro and create a “hard e-drachma”. John Major once proposed just such an extremely sensible alternative to the euro, which at the time was labeled the “hard ECU” (and ignored). The idea of the hard ECU was to have an electronic currency that would never exist in physical form but still be legal tender (put to one side what that actually means) in all EU member states.

You can see why this idea is so appealing. It allows for progress in monetary reform at low cost and acts to remove physical cash from circulation where it causes nothing but mischief and costs. We will soon see it tested, because the government of Ecuador has decided to launch it’s own system, a cross between the Canadian MINT experiment and Kenya’s M-PESA, a centralised government solution to what economists call “the big problem of small change”. An interesting aspect of this otherwise vanilla mobile phone pre-paid value transfer system is that will be denominated in US Dollars.

The US Dollar has been legal tender in Ecuador since 2000, when the post-gold standard “Sucre” was abandoned This, as economist John Kay noted back in 2013 saying that “a currency is anything that two people agree is a currency”, is in itself an interesting comment on the subject of what is or is not a currency. The US Federal Reserve banknotes that are in circulation in Ecuador, stuffed under mattresses in Ecuador and fuelling the less-formal sections of the Ecuadorian economy are in essence an interest-free loan to Uncle Sam. By replacing these with an electronic currency, or I suppose more strictly speaking an electronic currency board (because there will theoretically be a 100% reserve in actual US dollars), the Ecuadorian central bank can reclaim the seigniorage for itself.

All well and good and the ability to transact electronically will also be of great benefit to the citizens, saving them time and money just as it has done everywhere from Kenya to El Salvador. If I might be as bold as to make a warning from history, though, I should add that such a system would also benefit greatly from transparent auditing as it can be exceedingly hard for even most financially-sophisticated and economically-literate government to resist the temptation to over-issue once it can.

The citizens will not hold the electronic currency unless they are sure that it will remain redeemable at par for US dollars themselves. If the government were to choose to put more of the electronic US dollars in circulation than they have (or have the equivalent of) in reserve then they will simply be creating doomed electronic assignats that will never obtain traction in the wider economy and Ecuador will be unable to reap the many benefits of its transition away from cash. After all, you cannot simply create US Dollars or British Pounds or Euros out of thin air by changing a few numbers in a computer somewhere. Oh, wait…


Back to the Future

Michael Klein, then Chief Economist of the Royal Dutch/Shell group of companies, once observed that monetary regimes have changed around once per generation. They aren’t going to stop now. It is time for the shift to the next generation of money so let us start telling its story.

First though… don’t panic. We’ve been through monetary change of this magnitude several times before. Around four hundred years ago, for example, things were going horribly wrong with money in England. If you had asked people about the future of money at that time, they would have imagined better quality coins. What in fact happened was monetary revolution and a new paradigm. A generation later Britain had a central bank, paper money—although the smallest bank note, five pounds, was worth a month’s pay for a professional—as well as a gold standard, current accounts and overdrafts.

We are at a similar cusp now, with a mismatch between the mentality and the institutions of paper money from the industrial age and a new, post-industrial economy with a different technological basis for money. In a generation or so, there will be a completely new set of monetary arrangements in place and completely new institutions will manage them. Just as the machine-made, uniform, mechanised coinage introduced by Isaac Newton in 1696 better matched the commerce of the industrial revolution, so we can expect some form of digital money will better match the commerce of the information age.

But what will it look like? Are we really looking at a world of multiple, overlapping communities with a similar variety of values-based currencies? The ideas of the anthropologists like Weatherford and sociologists like Dodd [JL15] sugesst to me that  suggest to me that new technology will re-implement trust-based commerce within reputational groups: the clan of the Neolithic age becomes the global e-clan of the future. There is no need to remember who owes you what, who is good for how much and who owes who and how much, because the machine will do it for you, neatly summarised in the Kochrlakota quote I began with. The technology we have at hand, the dynamic combination of mobile phones and social networks, biometrics and big data, allow us to interact and transact in fluid and shifting ways, essentially using our reputations. This raises fascinating questions about the use of “money” within and across trust groups and that deserve further reflection.

That back-to-the-future vision may sound odd at first, but it seems congruent with the unfolding roadmaps of technology push, societal pull and business links between the two. A neolithic barter system based on networks of trust couldn’t scale into an economy of cities and settlements beyond kinship groups but the arrival of mobile phones and social networks and other new technology changes the dynamic again. As in so many other ways, the very newest technologies are reinventing old models.

In Part 2 I said that the shocking question about the society with no cash was whether certain kinds of people (women) would be allowed to use certain kinds of money (cards). The shocking question about the future of money based on trust groups is whether certain kinds of money will allow certain kinds of people to use it.


David G.W. Birch is Director of Innovation at Consult Hyperion, a technology consultancy specializing in secure electronic transactions. Before helping to found the company in 1986, he spent several years as a information technology consultant living and working in Europe, the Far East and North America. His most recent book, “Identity is the New Money”, was published by LPP in 2014. You can reach him via mail and follow him on Twitter @dgwbirch and LinkedIn.