Questions about the future of money by someone who is not a banker

Nov 27, 2016 by Brendan Jack

Money is basically a promise underwritten by banks, where everyone agrees that it has a value and we all go along with it. Ones and zeros in cyberspace, conjured up and manipulated by banking wizards. Money, it seems, is a fictional popularity contest.

Banks vouch for your financial standing, offer convenience in trading with customers and suppliers and stop you from getting robbed of paper money hidden in your floorboards.

Through over-lending and over-extension of 'money' in their coffers, banks tend to get a little too clever at everyone else's expense. When issuing you a loan, they're not at risk. They stand as gatekeepers to money, but will take your assets if you don’t pay. Imagine a casino with massive amounts of punters pouring in money, then the casino betting the money themselves. Either way, the house always wins. Access to your money gets monopolised, with the average Joe and Josephine paying to keep these institutions profitable. (Please don’t freeze my accounts, I’m just thinking out loud.)

The majority of money in the modern economy is created by commercial banks making loans. They’re said to loan out more money than they have in reserve at a 10:1 ratio - great odds. In many ways, banks can be seen as pyramid schemes that create debt, set to explode over time as bubbles develop and burst. This is followed by bailouts and no repercussion for crashing the world economy.

Which is why the enigmatic Satoshi Nakamoto (possibly an Australian programmer) unleashed his invented cryptocurrency called Bitcoin a month after the Lehman Brothers collapse in 2008.

Flipside of the coin

Digital currencies use encryption techniques to regulate generation of currency and verify transfer of funds, operating independently of a central bank. Cryptographically maintained currency has value imbued by the computers of its users, not a government mint. The hardware, software and mining math required for Bitcoin to exist can melt your brain.

Bitcoin is the poster child, but there are many competing currencies, including Dogecoin, Litecoin, Ripple and the new popular kid on the block(chain), Ethereum.

The transparent blockchain creates a ‘decentralised digital ledger' to avoid middlemen taking their share. The Internet becomes your new banker.

So do we still require a third party when software can provide us with what we need? Is cryptocurrency the evolution of money?

We certainly don’t want governments taking over banks and our money. We already know how efficient they are at using tax money on important things like private homes, jets and funding family projects. Cryptocurrency offers power to the people, especially the uber-geeks who know how to mine it.

Digital currency is often less volatile than local currencies, and because it’s finite like gold, it’s scarcity makes it more valuable. Venture capitalists haven’t been shy to finance Bitcoin since its inception, even though it’s yet to find its feet.

Ts and Cs apply

With currency exchange through banks we encounter bureaucracy, inconvenience and transaction expenses.

Digital currencies suit the free market as opposed to old banking monopolies. In her TED talk on the future of money, Neha Narula suggests how money is hindered by bloated institutions. Money currently "moves at the speed of banks.” But it can move a lot faster through cyberspace. Moving Bitcoin has almost no transfer costs and less capital control by institutions and government.

Why the need to visit a massive air-conditioned building and stand in line with cap in hand?

What about surveillance and being hacked? That's already happening with phishing and online fraud - cybersecurity just becomes even more important. How about the digital apocalypse, won’t we lose everything? If the Internet and all backups get wiped out, or if we reach the singularity and artificial intelligence takes over the Internet, this will also effect bank servers. So keep some cash in your mattress as backup, or learn a trade to barter when the world returns to analogue. I’ve grown some tasty strawberries for you, if you’re willing to fix my roof.

Digital gold standard

Payment apps such as PayPal, Venmo and Square already exist. But just as paper money was once backed by metal, payment apps require bank accounts or credit cards to work.

Cryptocurrencies makes peer-to-peer lending and micropayments easy, helping in places with unstable political or banking systems. They provide an international currency to pay online vendors or suppliers in any country. Cross-border transactions are simplified, automatic and less regulated, without greedy fingers taking their cut. You can now even crowdfund a project with Bitcoin via third party apps like Stripe and Blockchain’s Bitcoin Wallet.

Migrant labour is able to save on transfers, so there’s less siphoning off the poor. It can be transferred by SMS, so you don’t even need a smartphone app. Handy considering there are two billion people who don’t have bank accounts, but who have access to cellphones.

Summing up

Governments and banks will never give up their means to tax and profit, but how do you regulate the sprawling, shapeshifting beast called the Internet? Is digital currency an impractical pipe dream, soon to be manipulated? Once accepted by banks and worldwide audiences, do they become just another way to set debt traps as with traditional money? Perhaps when bankers break the world economy again without consequence, cryptocurrency will have its day.

There’s currently plenty of potential and scope, but not enough understanding and acceptance for practical use. Unfortunately we don’t all live in San Francisco where the local sushi restaurant accepts Bitcoin (or a pub on the Isle of Man called The Thirsty Pigeon, seriously), but the ball is rolling.

Do we need gatekeepers who say "trust us" in a nice suit, then take a percentage for looking after our money that doesn’t actually exist? Cryptocurrency is in its first wave. What does Money 2.0 look like, incorporating the evolution of blockchain technology?

We need banks that don’t only care about profit maximisation, that stand to serve the community and aid businesses and the economy. In the meantime, cryptocurrencies need to become part of mainstream transactions to scale and succeed.

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