Money is one of humanity’s greatest and most enduring inventions. It’s taken various shapes throughout history, from cowrie shells, scarce commodities, early coins, banknotes, and now the bank balances we see on a computer screen. But money is entering a new phase, taking another giant leap forward into a world of true digital currencies.
“What’s fascinating about this next stage is that there are various different forces at play that are fighting a battle for the future of money,” says Alex Tapscott, Managing Director, Digital Asset Group at Ninepoint Partners. The rise of bitcoin was fuelled by a desire for an alternative financial system to the existing state control and corporate oversight. After the first era of the internet – the internet of information – gave rise to giant companies like Facebook, Amazon, and Google, we find that these giants now look to dominate the next era of the internet: the internet of value. Facebook has already been experimenting with their own digital currency, as have central banks. But part of the attraction to bitcoin is that it is divorced from exactly these kinds of control: corporate or state.
Money Goes Through An Innovation Cycle Roughly Every 100 Years
The battle for the future of money and payments will be the defining story of our economic lives according to Tapscott. Anyone born after 1960 is likely only familiar with fiat money (where money has value because a central authority decrees it to have value). These dollars are not backed by any intrinsic value or hard asset other than the reliance on a stable government system that establishes confidence in the currency. Few of us remember a time where you could, or even wanted to, redeem your money for gold. And generations prior to ours would have known a world where central banks didn’t exist and individual commercial banks printed their own money.
Going back even further, monetary reform at the end of the 15th century led to the first international currency, the Spanish dollar, or “piece of eight”. “The Spanish piece of eight was called that because you could actually break it into eight pieces. It was divisible and fungible, and that innovation made it more useful,” says Tapscott.
The British pound later replaced Spanish dollars as the dominant reserve currency for global trade and global financial services. Not only because the British Navy ruled the Seven Seas, but because London was the preeminent financial center of the world. Today, US dollars are the main global reserve currency. Tapscott says it’s as much about cultural, economic, and financial power as it is about military or diplomatic power. And this is a regime the US has defended and promoted since the 1940s.
The Collision Course That Will Define The Future Monetary System
“Taking a step back and looking at all of this, we can see that money goes through an innovation cycle every 100 years or so – slightly longer than a human life. Most people only ever know the regime that corresponds to their generation. Bretton Woods, where the world’s post-WWII powers agreed to rules for international monetary and financial systems, was 80 years ago. We’re about due for another cycle of innovation.”
What is common to all previous global reserve currencies is that there was big state power backing the money of the day. “Now the question is whether money in the future will have implicit or explicit backing of a government, or will it be independent from government,” suggests Tapscott. He believes the most likely scenario we’re entering into is one where there isn’t a single dominant reserve currency, like the US dollar, but rather, where there are various different currency regimes. These would fall into three main categories:
- community-driven currencies like Bitcoin;
- corporate payments systems (for example, Facebook had been developing their own digital currency called Libra at one point), and;
- central bank digital currencies.
“These three forces are on a collision course and it’s the outcome of that explosion which is really going to be fascinating. I don’t think it’s as simple as saying ‘China is rising, the U.S. is declining, therefore China is going to be the reserve currency of the world’.”
Tapscott is skeptical as to whether a central bank would be in favour of a decentralized form of money when they have many reasons to want to remain in control. That said, there are both pros and cons to central bank digital currencies. During an economic slump, a central bank could create money and simply deposit it right into people’s digital wallets as a form of targeted and quick stimulus. But on the other hand, a repressive regime could use the perfect information to monitor exactly how people are spending money. What happens if it’s being used in ways that are not in line with the repressive government’s liking? In this case, the digital dollar is not a tool for economic freedom but rather, political control.
As for corporate payment systems, consumers are already weary of the access to data that internet giants have been able to accumulate and control. The appetite to relinquish financial infrastructure to these same corporate giants may be waning after the scrutiny they’ve faced due to scandals like Cambridge Analytica, the role they’ve played in recent elections, and questions about whether these private sector companies’ interests are aligned with those of customers or shareholders.
This all seems to suggest that a community-driven digital currency like bitcoin is a worthwhile contender in the future of money, whatever that future may ultimately look like. “The more that governments and big companies try to influence our economic lives, the more demand there is going to be for an alternative. Bitcoin is worth about half a trillion dollars and has been around for more than 10 years now. It’s worth that for a reason. Fads don’t last for 10 years. Bubbles don’t last for 10 years,” says Tapscott. “This is the beginning of something real.”