By Alex Tapscott
Money, one of humanity’s greatest and most enduring creations, is once again on the brink of a historic transformation. Money, which has evolved through the millennia from cowrie shells to clay tablets to precious metals, bank notes and bank balances, is taking another great leap forward. Money is becoming digital. The next decade of innovation will prove decisive as state powers, global corporations, and an increasingly assertive digital civil society vie for control over the lifeblood of our economic lives.
There are three leading contenders for the future of money, all based on blockchain technology. The first are public
cryptocurrencies like Bitcoin, which was designed from the outset to be a “peer-to-peer electronic cash system”—in other words, digital cash. The second are privately-issued digital dollars, backed by dollars or some other collateral. These
stablecoins today are mostly backed 1:1 to the USD but could be designed to hold a peg to a basket of currencies, like Facebook’s ill-fated Libra project. The third are central bank digital currencies (CBDCs), created by governments and central banks. Each are radically different in their composition and their potential impact.
“The great majority of people in the Middle Ages never saw any money at all during their entire lives,” said James Burnham about the Feudal economy, which was based on subsistence farming and barter. Capitalism changed the role of money from mere medium of exchange (a convenient way to exchange for goods when barter was not an option), to
capital more generally – something that by its nature could be used to earn more money by investing in physical plant like factories, lending to entrepreneurs and so forth.
As in ancient times, precious metals like gold served as the foundation for money during the early industrial era of capitalism. Why? Gold was non-perishable and had little useful purpose other than as a store of value. Money was something that people, “by mutual consent would take in exchange for the truly useful, but perishable supports of life.” In other word gold is useful as a store of value and medium of exchange because it is not
truly useful.
Gold’s preeminent role as money began to gradually erode in the late 19th century, starting with the Civil War, when the Federal Government issued Greenbacks backed only by faith in the government itself and ending a century later when President Nixon finally closed the ‘gold window’ ending international convertibility of the US dollar into gold. Today, currencies float against each other. They are issued by government fiat.
If gold was the basis for the early industrial age and fiat currency the basis for our modern globalized economy, then some form of digital money will form the basis for the digital economy. Once again, we are on the brink of another epochal shift in money. But which one will succeed?
The Three Kinds of Digital Money
Bitcoin has been a remarkable success story. It is worth nearly half a billion dollars and is used by people all around the world as a store of value and a medium of exchange. It is a lifeline to the world’s unbanked. It is permissionless and censorship resistant which makes it a favourite of freedom fighters as well as alt-right groups. It is also energy-intensive and volatile, much like gold and other commodities. It will likely grow in importance as a store of value and hedge against fiat currency devaluation, but it may not succeed as the dominant medium of exchange for the digital economy.
Central Bank Digital Currencies are touted by governments and central bankers as a better alternative that can make the economy more inclusive, reduce volatility and improve the responsiveness of central banks to crises. CBDC boosters must 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 the economy? Because of the worrying impact on civil liberties, CBDCs are likely to find more success in authoritarian regimes like China than in the U.S. or Canada where I expect they’ll be met with fierce resistance by some.
This brings us to the final main category: privately issued
stablecoins, which are the synthesis of CBDCs and cryptoassets - digital assets issues by companies backed by fiat currencies held in financial institutions. The leading versions, USDC and UDSDT, are worth more than $100 billion combined. Facebook attempted its own stablecoin, called Libra, which was originally based on a basket of assets. This was met with fierce resistance by the U.S. government who saw it as an afront to the U.S. dollar system, revealing the risks to any company trying to reinvent money.
There is a final nascent category of synthetic ‘decentralized’ stablecoins, which are backed by assets held in smart contracts (like a piece of software with a bank account). DAI is an example, though even it is somewhat centralized as much of its collateral is in USDC and now, treasuries. A decentralized stablecoin is the synthesis of privately issued money and public cryptoassets. They are pegged to the U.S. dollar but are permissionless and do not rely on a third party to work. They are hard to shut down, and free to use by anyone. Though small in comparison to others (DAI outstanding is worth about $6 billion USD) but they are the frontier of money and we should all be paying attention.
