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The Primacy of the Digital World – Planet BlockChain – Medium

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Part 2: Talking Money


In an earlier article (Part 1 of this series) I asked the question whether we’re on the cusp of a profound societal change when the digital world becomes primary. This piece deals with one of the most important spheres in human life — money. Much of the current monetary system — based on fiat money — has already been digitised and has become part and parcel of our daily lives. If in the 1970s and before 100% of USD was paper-based, now over 90% of the USD is digital. But the adoption of money native to the internet — cryptocurrencies — is far more intriguing to explore.

An incomplete history of e-money

Did you ever wonder how the idea of cryptocurrency come about? Here is a very brief and incomplete history. Anthropologist David Graeber, in his opus magnum Debt: The First 5,000 Years, suggests that the original form of money was a virtual unit of account. Credit system, tabs, expense accounts — all existed long before cash, coins and barter. History tended to move back and forth between periods dominated by gold and silver as money and periods where money was assumed to be an abstraction, a virtual unit of account.

Cash became “digital” in the late 1980s when David Chaum established DigiCash, possibly the first company that tried to solve the problem of online payments with Ecash and cyberbucks. In those days the internet was new, security and data encryption standards were just emerging, and consumers were not comfortable with giving out their credit card details when shopping online. DigiCash was the solution. The start-up must have run into the classic chicken-and-egg problem most entrepreneurs in network markets are familiar with. It was hard to persuade both banks and merchants to adopt the system; and because not many merchants were willing to adopt it, consumers wouldn’t use it either. Other innovative projects — Mondex, NetCash, e-Gold and DigiGold — followed, pegging digital cash to the dollar in a bank or a commodity (i.e., gold). These were “centralised” solutions which did not survive. Overall, there were about one hundred cryptographic payment systems and proposals, and only one of them (PayPal) survived to this day.

Creating a free floating digital currency issued and valued independently of any other currency or commodity was a radical idea building on two streams of earlier inventions: creating value requires scarcity (in the digital world, this involves solving complex computational problems) and securing transactions (“timestamping”) on a blockchain while preventing double spend. Bitcoin, the first implementation of these ideas in 2008, made it possible to transfer value over the internet without requiring a centralised entity. And so a purely peer-to-peer version of electronic cash was born.

Tailwinds and Headwinds

Going back to the original question I had — are we at a tipping point to embrace e-money as primary? The adoption of an innovation is a social process, and so any transformative innovation needs to be widely diffused to be sustainable. The turning point for wider adoption is said to be about 16% of the population, which includes innovators (2.5%) and early adopters (13.5%). With about 1% of the world’s population holding cryptocurrencies, we are clearly “not there yet”. Adoption rates do vary across the world, though: for example, it’s 8% in the U.S., Austria and Italy and as high as 18% in Turkey (so beyond the 16% threshold). But the very fact that a group of people around the world have reached social consensus on “funny internet money” having value is in itself quite remarkable.

To be sure, cryptocurrencies face significant headwinds, not in the least because of inconsistent and fragmented regulations (Is it a currency? Security? Commodity? A new asset class? Should we ban it?) and technological immaturity and complexity. The tailwinds, I believe, are disproportionately stronger.

Ben Horowitz observed that there is one thing deceptive about blockchain and cryptocurrencies. While blockchain is on many fronts inferior to existing computer systems, it has one novel feature that never existed before — trust. Trust in math, not in any centralised entity. Monetary systems rely purely on trust, and yet trust in centralised systems is collapsing. Trust in the U.S. government is at the lowest levels in the last 60 years (only about 20% of the population trust in government). In many other countries — including Lebanon, Tunisia, Italy, Greece, Brazil and Argentina– trust is governments is even worse. It is probably fair to assume that regions with unstable financial or political systems make cryptocurrencies more attractive. It doesn’t take a statistician to figure out why Turkey has one of the highest levels of cryptocurrency adoption or why Venezuela is planning to issue its own cryptocurrency — they also have some of the highest inflation rates in the world. Have you recently come across pictures of Venezuelians dumping paper money as trash? We are likely to see adoption at faster rates in those countries where trust in governments is breaking down.

The next factor is…well, millennials. A colleague of mine used to say sarcastically that the answer to every problem and solution in the world is millennials. But for cryptocurrency adoption millennials, the largest population cohort ever, do matter. They — and this is 92% of them in the U.S. — simply don’t trust the current banking system and would rather have a meaningful financial relationship with Facebook, Apple, Google and the like. One of the most powerful insights for me recently is this one:

…if you want to understand the world, you need to look at it through the eyes of a 20-year old. Blockchain and cryptocurrencies are a millennial story.

Previous generations invested in gold, equities and hedge funds, millennials prefer growth stocks and digital companies. And while the jury is still out there on what actually contributed to a surge of the bitcoin price in 2016, the fact that 2016 was also the first year when millennials entered their first savings year is definitely food for thought.

The strongest tailwind is this: when a global digital reserve asset emerges, it may be worth tens of trillions of dollars. If you happen to believe in technological singularity, then global GDP by 2040 may be quintillions of 2018 dollars. It makes sense to digitize the largest asset classes — real estate, equities, bonds, commodities and cash (value at stake is some $280 trillion) as most of the property rights to these assets (e.g., land title deeds) and their exchange are still paper based. Kyle Samani of Multicoin Capital believes that on a longer time scale 100% of the three major asset classes — real estate, equities and bonds — will be managed on a blockchain. Tim Draper is equally bullish: in his words, “[t]he internet went after industries that were $10–100 billion dollar markets, cryptocurrency will go after trillion dollar markets — these are finance, healthcare and insurance, banking and investment banking, and governments.”

“Technology” by Soham Banerjee

What will it take for the rest of the global population to adopt cryptocurencies? Some smart people speculate that this could happen via cryptocurrencies being used as a store of value (as long as it’s self-sovereign, censorship resistant, secure and scarce) or have some utility (e.g., private, fast, flexible, programmable and giving access to digital services). The latter category could be adopted via dApps and smart contracts, where native tokens are used as internal currencies. One such native tokencould become a global digital reserve asset worth tens of trillions of dollars. It is also possiblethat many governments will issue their own fiat currencies on permissioned blockchains controlled by central banks.

The adoption rates of cryptocurrencies are low… but it won’t stay that way for long. This is just another evolution of digital money.

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