There are many things in life I am fond of. Money or wealth is certainly one of them. As someone dealing with banks and their back end infrastructure, I have a very good understanding of what money is. And as a computer programmer who has a Finance background, I can share my thoughts on where I think the future of the money is.
Money has been subject to a constant function of evolution throughout the human history. I am not going to walk you through the history of evoloution of money, you can google that. But there is one thing we can pick up from history; Aristotle defined money as a i). medium of exchange ii). a unit of account. iii). a store of value. For centuries, liquid cash has served all three of these purposes. Additionally, Aristotle defined ‘sound money’, which I will discuss later on this article.
Working in the banking sector, one question hit me hard. What is money after all? There are so many definitions of money, so many characteristics, so many theories. But what exactly is money? There is not a definitive answer. There are ways to define money but no exact way. I started thinking about what the best way to describe money would be. I think the best way to define money is as ‘information’. Money is stored information that cannot be corrupted. Any currency in the world has value due to enforced scarcity by a Central Governing Body which would be State Banks or FED. This value could easily be assigned to a bottle of water, to a chair, to a fruit. Then we’d all be paying each other in fruits! Whatever tangible or intangible object stores that value, is money. When it comes to tangible objects, we are talking about fiat currency. Bills, that you can actually see which is just a printed paper with additional security measures to prevent corruption of its information. What could be the intangible form of money? The ontology of it all is not that complicated. People understand the intangible form of money now, thanks to the gaining popularity of Cryptocurrencies. But up until now, the only form of money that we have had in the intangible form has been the electronic funds stored in your account. The electronic funds in the bank account is not real money. It is a number displayed to you as a reference of the accrued sum total you hold in a certain bank, whose reserves are monitored by a Central Banking Regulatory Authority. These governing bodies do enjoy certain privileges like being able to print more money or in simple words changing the value assigned to a long long ‘int’. LOL, I guess?!
Realizing that the funds stored in your bank account is just a string of code maintained at a central database; is it really the most efficient and best possible way to store it? There are much better methods at our disposal. One of the most efficient ways that have come to light in the recent past are Cryptocurrencies. The only question that remains then is how does Cryptocurrency fare against the other lines of code stored in a government database?
The most prominent difference that one could identify is that, cryptocurrencies are less susceptible to manipulation, and especially manipulation from a single governing body that can tell you at any point in time that “Now, your money is not worth as much as it was yesterday”, whether or not you hold the same amount. Or in other words, enforced scarcity. Second difference you could probably find would be in the structural integrity of the program that is dealing with these transactions. Is it such a bad idea to make the very database potentially more secure using tools at our disposal like a Distributed Ledger Technology? That is until the quantum computers are able to decipher them. But we have sometime till then. So, keep reading.
The future of money very much relies on technologies like Blockchain that can help create better versions of currencies. Central Bank Digital Currencies are currently being debated on in great lengths. About 91 countries are presently in the pursuit of creating this technology.
CBDCs or Central Bank Digital Currencies are a game changer in such a field. The concepts of permissioned blockchain are debatable. And with growing economies, a complete decentralization may not be such a good idea. I will definitely come to them in a later article. However, with the same privileges that a government enjoys now, a DLT based currency is not a bad idea at all; be it a permissioned blockchain. It is essentially the replication of the financial system on the internet. But what’s more is, it’ll forever bridge the gap between real money, and ints stored in a database which represent the real money. The system also has to be able to replicate the current Financial System in large onto the blockchain network while taking Financial Institutions on board. Well, without cash being involved, it could potentially be the fastest transition in the history.
In the midst of all of that, the most important question is yet unanswered on a large scale. What kind of consensus mechanism or transactions approval system needs to be created that provides a network architecture that is impenetrable, and is able to handle transactions seamlessly while being energy efficient, unlike Bitcoin. For now, I will side-step the debate about decentralization as governance of such a system is a very complicated topic. I want to strictly focus on the improved technology that we have at our disposal. But again, I will definitely get to that in a later article.
Another important point to ponder on is if a CBDC fully serves the functions of cash? The answer to that is very simple, yes! CBDCs can also easily fit the properties of sound money defined by Aristotle. Aristotle defined sound money as something that was i). Durable ii). Scarce iii). Recognizable iv). Divisible v).Transferrable vi). Fungible. Scarcity is enforced by government for their currencies. For all reasons authentic, the scarcity of such a currency could be made fully autonomous. Minting or destroying currency can even be managed in real time, which is far more superior than anything slow governments could concoct. Real time money management is a thing, and I hope that is another lesson we are soon able to impart in the economies of countries. That would actually take our economic progress to a whole new level.
Cryptocurrencies have caused huge economic leakages in a lot of countries. Especially countries that do not have an advanced enough banking infrastructure to allow for cryptocurrencies. These countries have faced economic leakages in billions of dollars. So, a CBDC for such countries that serves as a hedge against that economic leakage and against cryptocurrencies could be a realistic solution. Every nations’ currencies have taken a dive against cryptocurrencies, while they keep on rising in a net bull environment.
So, how can governments stop the constant downfall of their currencies against Cryptocurrencies? Especially if these cryptocurrencies have market capitalizations of more than the GDP of most countries. The distrust of the governments has played a more than significant role in the development of these markets. And the slow adoption rates, and responses of governments are only validating these arguments as we have seen in the last decade.
Focusing on these very arguments, creating a new consensus algorithm that could replicate the traditional banking network onto a DLT. There is a lot of work being done on such technologies, and I have been working on developing such an architecture myself.
Cash is a humungous waste of paper, ink and energy. Cash is a relic of the time gone by, and there is no reason to hold on to the past. It is the most in-efficient medium of transactions as there are many other solutions available to exchange value. The real pain for countries is when these cryptocurrencies based on their validity become a trillion dollar market, and become too big to ignore. And they have for a while now! I talked about quantum computers threat to blockchain networks and many others. Luckily, there are many companies working on inventing post-quantum encryption algorithms. That is one risk that can be managed very well. And who is to say that in a post-quantum time, this would be our biggest problem? What about the petabytes of sensitive data generated every minute of every day that would be at risk of exposure?
Cryptocurrencies are an unstoppable force that allow anyone to create their own value in the form of currency and transact in a medium of their choosing, safeguarding them from market risk and inflation. I can only wonder, how long do we have to wait before a self-autonomous money management system that does not require enforced scarcity but has managed scarcity? How long will the governments deny this technology? And are their actions setting up a foundation for currency crisis?
