Currencies of the Future

21 Jun 2018

In the early 1900s, a society in Micronesia called the Yap used limestone discs or ‘Rai stones’ as currency. At around 12 feet tall they are large and too big to carry or trade. As a result, this form of money became abstract. Instead of trading stones as we trade coins, the Yap created a ledger of who owned what part of the stone using an agreed value throughout the society.

Such is the abstract concept of this currency that as legend would have it, a storm during an ocean voyage caused one of these stones to be knocked into the sea.  Scott Fitzpatrick, an anthropologist at North Carolina State University and an expert on Yap says that instead of thinking of the stone as ‘lost’, they decided that it still counted as it still existed, “so somebody today owns this piece of stone money, even though nobody’s seen it for over 100 years or more.” Today, although stone money has been replaced by the US dollar for day-to-day transactions, for more conceptual exchanges, like rights or customsstones remain a vital currency for Yap’s 11,000 residents.

Whilst this example shows that the concept of abstract money dates back centuries, we are increasingly moving towards a future in which our own money is intangible. According to a recent report from G4S, which manages cash distribution systems, physical money now accounts for just 9.6 per cent of global gross domestic product.

The growth of the digital economy has already disrupted industries as diverse as media, music and transportation. The growth of e-commerce and apps for ordering taxis or paying for restaurants means that the physical act of paying is already somewhat forgotten. As the Internet of Things enables a new round of machine-to-machine transaction growth in the years ahead, payment virtualization will intensify, with the potential for a proliferation of new stores of value to escape the cost, complexity and regulatory rigidity of traditional money.

The future of money is programmable, it is the combination of software and currency, allowing money to become more than a static unit of value. Digital money removes humans and institutions from the loop, directing money via software safely and quickly.

As a report by professional services firm Ernst&Young explains: “Regulators, governments and businesses alike have much to gain as the internet of money gets under way. Leveraging low-cost, open-source technologies — such as cryptocurrencies blockchain or other distributed ledgers — opens the door to reaching poorer or excluded customers and serving needs that are not met by the existing financial services infrastructure.”

Driven by the benefit of global, rapid transfers in a relatively secure environment, digital money has become a reality. In fact, it has become common place in numerous societies with many of us paying bills online, receiving a salary through bank deposits, and making purchases online or via contactless payment in stores. In a number of ways, digital currency such as credit and debit cards, payment apps and digital wallets are superior to cash; they are germ-free, quick and convenient, and help prevent crimes such as tax evasion and terrorism. However as opposed to physical trades, these exchanges are no more than changes to codes on computers that represent a trade.

Cryptocurrencies are based on same idea that the Yap used – a collective global knowledge of transfers. Programmable money in the form of cryptocurrencies rely on secure communication, and central to this are two key points; hiding information in plain sight and verifying the source of information, they also allow decentralised ledgers, designed to work without intermediaries, circumnavigating the friction previously experienced. They allow a person to pay securely without having to sign up or ask permission, or do a conversion, globally. This permission-less innovation is going to change the way we pay, allocate and decide on value.

As these benefits become more widely understood, a number of governments have begun to question the future of currency in their country. For example, in South Korea, the growing dominance of electronic money has supported the central bank’s 2020 target to phase out coins. Across Europe, a number of countries have phased out small denominations, for instance, in the UK, a government consultation is investigating whether 1p and 2p coins are “efficient or cost effective”.

In China, much of the younger, urban population rely solely on smartphone money, while governments in Africa have launched a number of partnerships to help people gain access to finance. Indeed, according to research by Stockholm’s KTH Royal Institute of Technology, in Sweden, only 19% of payments are made using cash, compare to a European average of almost 80%, and this total is likely to reach zero in just five years. In its place, Swedish citizens rely on card or the ‘Swish’ app that allows payments using a mobile or QR code.

However, digital or programmable money does face challenges. For example, the current infrastructure used to support digital financial transactions has a number of areas of friction that cause the currency system to slow down. This friction means it can take a long time to implement changes or updates in infrastructure, it also means there can be issues using credit cards in differing geographies and transferring money across borders or currencies can be expensive.

Key to many of these issues is that the institutions that control the money supply don’t have the infrastructure in place to deal with each other seamlessly on a digital platform, and this blocks what we can do as consumers. It also makes transaction costs go up. In a digital world, money is faster, but only if gatekeeper institutions allow it. Therefore, money only moves at the speed of banks.

In addition, cryptocurrencies are not crime-proof. They can be used for illegal transactions, just as cash is, and if all transactions are online, it poses the issue of how we track who is watching. Indeed, where are the areas weak to exploitation and is there bias in any form? And crucially, a wholly cashless society that consequently relies on the internet to survive is vulnerable to the power lines go down, machine malfunction or the banks mismanaging their IT systems, as has happened recently at the UK’s TSB bank. In addition, digital money could also create a new form of warfare. Bjorn Eriksson, the former chief of Interpol’s cites state-sponsored cyber warfare as “the biggest risk to future business”. 

Whilst the solution to each of these challenges are as yet unknown, it is crucial that authorities and governments seek to determine governance frameworks that provide protection for all stakeholders. As Ernst & Young put it “creating trust in digital money as a safe store of value, while encouraging disruptive innovation, will require governments and regulators to work more closely with a wider range of stakeholders — including technology start-ups — than would previously have been thinkable.”

The freedom programmable money enables is likely to lead to changes to society and business we can’t yet predict. Therefore, whilst programmable money removes the need for large institutions and instead relies on architecture of a network there are governance concerns that must be addressed in order to protect both the technology and the customer or citizen.

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