Money, one of mankind’s most important and enduring creations, is once again on the brink of a historic transformation. After evolving over the millennia from cowrie shells to clay tablets to precious metals to paper notes and bank balances, money is taking another big leap forward: it is becoming fully digital.
There are three main candidates for the future of money – a central theme of the next event from the Blockchain Research Institute, W3B and Blockchain World. The first are public cryptocurrencies like Bitcoin, which was designed from the start to be a “peer-to-peer electronic payment system”, i.e. digital cash. The latter are digital dollars issued by individuals, backed by dollars or other collateral. Today, these stablecoins are mostly pegged 1:1 to the US dollar, but could be designed to maintain a link to a basket of currencies, like Facebook’s ill-fated Libra project. The third are central bank digital currencies, aka CBDCs, created by governments and central banks. Each is radically different in composition and potential impact.
“The vast majority of people in the Middle Ages never saw money at all in their entire lives,” James Burnham, a renowned 20th-century scholar and historian, said of the feudal economy, which was based on subsistence agriculture and barter. The capi factories, loans to entrepreneurs, etc.
As in ancient times, precious metals like gold served as the basis of money in the early industrial age of capitalism. Money, according to John Locke, was something people “took by mutual agreement in exchange for the truly useful but perishable means of subsistence”. In other words, gold is useful as a store of value and a medium of exchange because it’s not “really useful”. Gold’s preeminent role as money began to decline in the late 19th century, beginning with the American Civil War, when the federal government issued paper notes backed only by faith in the government itself. . It ended a century later when President Richard Nixon finally closed the “gold window” and ended the international convertibility of the US dollar into gold. Today currencies float against each other and are issued by government fiat.
If gold was the foundation of the early industrial age and fiat currency the foundation of our modern globalized economy, then some form of digital currency will be the foundation of the digital economy. Once again, we are on the verge of another epochal change in money. But which one will succeed?
three suitors
Bitcoin has been a remarkable achievement. It is worth nearly half a billion dollars and is used everywhere as a store of value and medium of exchange, and has been a lifeline for the unbanked who can stomach its volatility and slowness. It is permissionless and censorship resistant, making it a favorite of freedom fighters as well as alt-right groups. It is also energy intensive and volatile, just like gold and other commodities. It will likely become more important as a store of value, but will be insufficient as a medium of exchange.
CBDCs are being touted by governments and central bankers as a better alternative that can make the economy more inclusive, reduce volatility, and improve central bank responsiveness to crises. But CBDC boosters have to answer some tough questions. For example, how exactly do we protect privacy rights when the government can see in real time how every dollar is being spent in an economy? Because of the disturbing impact on civil liberties, CBDCs are likely to find more success in authoritarian regimes like China than in the United States or Canada, where I expect they will find a fierce resistance from some.
This brings us to the final contender to be the money of the future: stablecoins. Synthesis of CBDCs and crypto-assets like Bitcoin, these are digital assets issued by companies backed by fiat currencies held in financial institutions. The major releases, USDC and USDT, are worth over $100 billion combined. Facebook’s attempt at a stablecoin, Libra, was originally based on a basket of assets. This was met with fierce resistance from the US government, which slammed it as a potential threat to the dollar system – a cautionary tale for any business trying to reinvent currency.
There are also “decentralized” synthetic stablecoins, which are backed by assets held in smart contracts (like software with a bank account). DAI is one example, albeit somewhat centralized as much of its collateral is in USDC and now in US Treasuries. A decentralized stablecoin is the synthesis of private currency and public crypto-assets. They are pegged to the US dollar but are permissionless and do not depend on a third party to operate. They are difficult to close and can be used by anyone. Although small compared to the others (the outstanding DAI is worth around $6 billion), they are the frontier of money, and we should all pay attention to them. Intuitively, one would assume that the decentralized digital economy of Web3 should embrace these types of decentralized money, but at this point it seems that centralized stablecoins like USDC have the commodity market fit and advantage first come.
Alex Tapscott is co-founder of The Blockchain Research Institute, host of W3B and Blockchain World, in Toronto, November 8-9. Alex is also the Managing Director of The Ninepoint Digital Asset Group. This article is for informational purposes only and should not be considered investment advice. A version of this article originally appeared in the Ninepoint Weekly Note, Summary of digital assets.
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