Open the News App on your phone and you will find numerous Business headlines about FinTech companies and startups. If you read enough of these articles, you eventually end up thinking that the future of money will simply be a paperless and branchless version of the financial system that exists today. In my personal view, a moderately updated version of the existing banking and financial system is not an accurate picture of the future of digital money.
In this article I want to discuss what I believe are the 3 main systems in the battle for the Future of Digital Money. These 3 systems are important in their own right and they are inextricably linked. They represent the interests of citizens, corporations, entrepreneurs, non-profits, governments, central banks, bureaucrats and pretty much every other stakeholder you could possibly imagine.
All of these stakeholders have their own political views and varying levels of power within the global financial system. They all have different values and belief systems. Everybody wants Digital Money to reflect their own interests, and I believe these interests are the heart of the battle.
There is no coherent discussion about all three systems in one place. We need to start the real conversation around the Future of Digital Money which include:
Open vs Closed Payment Systems
Government Currencies vs Private Currencies
Fiat Currency vs Sound Money
The way that these 3 systems develop either separately, or when combined together, will shape the society we all live in. They will impact everything we do including how we trade and transact with each other as citizens and consumers.
1. Open vs Closed Payment Systems
Before talking about Open and Closed Systems in more detail, let me define them in the context of this article. An ‘Open’ System would include things like bank transfers from one account to another, or simple cash payments. A ‘Closed’ System would include something like Apple Cash in the US, AliPay in China, or PayTM in India.
Closed Systems are very convenient to send and request money compared to Open Systems. What could be easier than splitting a bill for last night's dinner using iMessage or WeChat Pay? It's much quicker than typing out a Bank Account and Branch Number, or finding the correct amount of cash. So many people have smartphones, it is a feature that can be activated very quickly instead of a physical cash transaction.
Instant Transfers are no doubt one of the best advantages of Closed Systems vs Bank Transfers. Whether you are a business or an individual, being able to send or receive funds instantly is what many people have wanted for a long time.
The new Uber Money Digital Wallet is a great example of what is possible. Uber drivers and couriers can be paid for their journeys in real-time instead of waiting for a weekly payment. The wallet is integrated into the Uber Debit Card which gives drivers cashback on fuel purchases. This is all possible thank to the Uber Debit Account.
Big Tech vs Banks
The speed and convenience of Closed payment systems are putting Big Tech on a direct collision course with the Banks.
In this article from Bloomberg, this sentence sums up the situation perfectly "Western bankers and credit-card executives who travel to China keep returning with the same anxiety: Payments can happen cheaply and easily without them". This refers to the observation of Chinese people sending money and shopping with AliPay and WeChat which means the banks never get a cut.
Another example comes from Australia where in 2017, Apple ordered Westpac Bank to remove the Keyboard function from their revamped iOS banking app. The keyboard allowed users to send money through messaging and to receive codes to withdraw money from ATM machines.
Increasing Competition? Or Shifting Market Power?
For banks to face real competition for the first time is great. They will have to offer better services at a lower cost in order to compete, which is great for customers and businesses. However, if one private company has significantly more market power over another, this doesn't necessarily increase competitiveness in the long-term.
Closed Systems are a Single Point of Failure
It's a risk to have everything about your life stored in a Smartphone such as your driving license, healthcare cards and other sensitive information. When things go wrong with a Closed System it can be a disaster.
An example of this is when Luke Kurtis had his Apple account shut down incorrectly. He bought an Apple Gift Card from an online discount store which was reported as fraudulent. Restoring his account was an absolute nightmare. Closed Systems are a massive risk when things break and there is nobody to call.
2. Government Currencies vs Private Currencies
Private Currencies don't just have to be based on money. Technology makes it possible to create entirely new solutions such as trading time as a unit of exchange instead of currency. Startups such as Chronobank have been working on these new types of systems and I'm sure a successful model will eventually emerge.
I believe that the battle between Private Currencies and Government-issued Currencies will be the most ferocious. If you're reading this article, it probably won't come as too much of a surprise to realise that this is because these competing systems pit the power of the State against the Individual.
Money Printing and QE
Money printing has devalued all Government-issued currencies around the world. The most catastrophic results of this have been in countries like Venezuela (suffering from hyperinflation and starvation) and Argentina (again, suffering from inflation) in the past few years.
Government-issued currencies are a monopoly and monopolies often cause problems that manifest in many ways. One way to fix these problems is for people to start increasing their use of Private Currencies to re-balance the power between the State and the Individual.
Enter Bitcoin and Cryptocurrency
Bitcoin and cryptocurrencies have taken off especially in South America and other countries where there has been civil unrest due to financial mismanagement and corruption. The success of Dash Coin in Venezuela demonstrates how important cryptocurrency is in some parts of the world as Government-issued currency has become worthless.
By using decentralised cryptocurrencies like Bitcoin and Dash, people can have full control and custody of their own money. For the first time ever, you can Be Your Own Bank (BYOB). There is no central organisation that can block your transactions or shut down access to your Crypto Wallet.
A few examples are:
- BAT Token - from the Privacy-focused Brave Web Browser Team. The Brave browser allows you to earn and spend cryptocurrency by the simple act of browsing the web on your favourite sites.
- Chainlink – a Smart Contract system which connects to Cryptocurrency and Regular Payment Systems.
- Monero - a private cryptocurrency where transactions cannot be tracked.
3. Fiat Currency vs Sound Money
We all mistakenly call the cash in our wallets and bank accounts Money. What we really have is Fiat Currency not Money.
Fiat Currency, which is what we all earn and spend, is not backed by any physical commodity of value such as Gold and Silver. It is just paper. It loses value the longer you hold it thanks to inflation.
Money is a long-term store of value. The only true stores of value throughout history have been Gold and Silver. Gold and Silver are often referred to as 'Sound Money'.
Currencies like the US Dollar and British Pound used to be backed by Gold and Silver. A US Dollar Bill used to say: "Silver Certificate" at the top. Now it says: "Federal Reserve Note". The former could be exchanged for real silver at the bank. The latter (which exists today) can't be exchanged for anything which has intrinsic value.
Why Fiat Currency is a Big Problem
Many people are protesting around the world right now over issues such as fuel and food price increases. In fact, what's happening is that the value of their currencies are declining. Most people simply don't understand this. Anger and frustration are boiling over into the streets as people must work harder and harder to maintain their standard of living.
A Return to the Gold Standard?
Due to the problems caused by Fiat Currencies, an increasing number of people are calling for a return to a Gold Standard or to make Gold and Silver legal tender. Many traditional economists say that this simply isn't possible and nor is it practical.
Two key stories from the last few months show the tension between these two opposing views:
The first was the astonishing comment from the incoming ECB President Christine Lagarde:
"We should be happier to have a job than to have our savings protected" - link
The second was from the Dutch Central Bank, aka De Nederlandse Bank (DNB), said:
"If the entire system collapses, the gold stock provides collateral to start over. Gold gives confidence in the power of the central bank's balance sheet" - link
The first statement from Christine Lagarde sends a strong message that anybody who has worked and saved hard should start moving their wealth outside the banking system as quickly as possible.
The second statement from the Dutch Central Bank confirms what most people in the Bitcoin world believe already, which is that the current global monetary system is breaking down and it is only a matter of time before it is reset.
These differing views of the world will create power struggles between nation-states along with many other groups in society. Gold, Silver, Bitcoin and Cryptocurrencies are some of the asset classes that could potentially be used as a long-term store of value.
Mixing the 3 Systems
Earlier I mentioned that each of these 3 systems were important by themselves. When you go one level deeper and see the impact they have on each other, you realise how many potential scenarios could play out.
Private Currencies Mixed with Sound Money
One innovation that has been made possible by recent technological developments is by mixing Physical Gold with Blockchain Technology. Goldmoney Inc provides a service where you can transfer money into a savings account and it will be used to purchase an equivalent amount of Gold and stored safely in their vaults. You won't have to worry about storing it safely or any of the other hassles that come from buying Gold. They also let customers redeem Gold in physical bars or coins.
Closed Systems vs Digital Government Dollars
If we get to a situation where 100% of all financial transactions in a country are digitally logged, this consolidates a vast amount of data into the hands of relatively few companies and institutions.
Whether the data sits with Big Tech in their closed payment systems, or whether the data sits with the tax authority in your country after you've used digital government-issued dollars, the data can be abused. The Chinese Social Credit System (where your behaviour determines what you can buy), is one of the biggest concerns in this area.
Private Currencies vs Open Systems
The idea of using Private Currencies that are not money at all presents challenges to Governments. If people start to trade units of their time in exchange for goods and services, that drains tax revenues from Governments. If you would be happy to perform 2 hours of bricklaying in exchange for 4 hours of a car mechanic's time to fix your truck, how would a Government tax that? You can't 'pay' a Government 60-minutes of time as a tax payment using an electronic bank transfer system, for example.
A good alternative could be something like what Japanese retailer Rakuten (often called the Amazon of Japan) is planning with its upcoming Rakuten Coin, which is based on Blockchain technology. Rakuten plans to let customers use the coin in all its businesses including Retail and it's Viber mobile messaging app. In addition, it is hoping to let people use the cryptocurrency as a borderless payment method.
These are just a few scenarios and examples that I can think of. I'm sure that you can think of many more.
The ways in which the Digital Money landscape evolves will determine which one of two worlds we will live in. We could live in a world with better, faster, more flexible and resilient private currencies which serve everyone in society. Or we could live in a world with Government-issued Digital Currencies complete with authoritarian levels of tracking and surveillance ready to be misused against anyone.
What are your thoughts on the Future of Digital Money? Have you used Digital Wallets or Cryptocurrency? Have you changed how you pay for things based on concerns around privacy and security? Please share your thoughts and comments.