Monday, October 18, 2021
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The Future of Money Part 2

Money will be digital, that’s a given, but do you understand what that means for you? The answer goes well beyond your ability to use your phone to pay for things, in fact, future money will become programable. In this video Futurist Chris Crespo discusses how the future of money will unlock possibilities that will make your life more convenient, but could also limit your freedom to choose when and how to spend it.

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The following is a transcript of the above video

In previous videos we talked about how value is being diversified away from money in the traditional sense and how digital tokens are now allowing us to capture value that previously had not been part of our monetary system. 

Things like community activities, sustainability, and fitness are values that thanks to technology, we are for the first time, being able to capture and store using digital tokens.

The value of these tokens comes from things like scarcity: their supply is limited and in most cases finite as is the case of bitcoin which has been programmed to only ever release 21 million bitcoins into the economy. Tokens also have value also because of something called proof of work, which is a mechanism through which the computers connected to the network solve a complex cryptographic problem and get rewarded for it with tokens. But finally and most importantly, they have value because the people who use them believe that they do.

I think by now it is pretty obvious that the future of money will be digital. But what is much more interesting is the colossal battle of ideologies being fought on the money front, which will impact generations to come. You see this battle is not about the future of money, what’s at stake here is nothing less that the monopoly over the future of Trust.

As society we are pretty used to outsourcing trust from individuals like you and me, to strong central institutions that enforce the rule of law. Central banks are one of those central institutions and their role in the control of money is pretty much absolute. Central banks control how much money is injected into the economy, and how much the money is worth by regulating the interest rate and controlling inflation.

But in recent years we have seen a crisis of trust in central institutions and the rise of trust enabling technologies which is building momentum towards a paradigm shift in in the locust of trust. And this is because technology can now pretty much replace most of the functions of central banks, regulators and commercial banks. For example, it can enforce regulation, execute monetary policy, enable people who don’t trust each other to transact and even keep digital immutable records of every single transaction.

But this is where the fiercest battle of ideologies is taking place. On the one hand we have the emergence of cryptocurrencies which for the most part are based on a system of values that is radically different from what we’ve known so far.

Cryptocurrencies are built on technology systems that seek to promote values like privacy. When you transact with cryptocurrencies, you do not have to reveal your identity, which stands in stark contrast to a process that regulators and banks enforce called KYC or Know your Customer. Through the KYC process, customers must reveal a number of things about their identity before they can even open a bank account.

Cryptocurrencies are also transparent, in the sense that every transaction that is performed is visible to everyone in the community that uses uses the cryptocurrency. They are also distributed, which means that they do not require a central authority to oversee the functioning of the system. They are democratic as the community “votes” for new features that they want to implement in the system. Cryptocurrencies are also finite which means that their value will not be debased by endlessly creating more and more tokens. And finally, they are also secure. The system can self correct any attempts from third parties with malicious intent who try to tamper with the system.

On the other corner of the battlefield, we have Central Banks, who are starting to get worried at the fact that more and more people are using cryptocurrencies as both investment assets and also as ways of paying for goods and services.  Central banks worry that this trend could destabilise national monetary systems.

Take for example the case of Nigeria who has now prohibited transactions on cryptocurrencies in the banking sector. Or the case of Norway who is politely asking it citizens to declare ownership of cryptocurrencies, or else…  

The Norwegian Tax Administration said earlier in 2021: crypto transactions are “more visible than many people think” and the agency is following crypto activity closely.

In response to the surge of cryptocurrency, many central banks across the world are now running pilots with their own version of digital money called Central Bank Digital Currencies or CBDCs. Like Cryptocurrencies, CBDCs are Digital, in the sense that they only exist within computer networks, but they vary significantly when it comes to the principles and virtues that their system is trying to promote.

To begin with CBDCs rely on a public system, this means that holders must identify make themselves known to the state before they can transact.

CBDCs are also state issued and as such they are prone to states monetary policy. Central banks can still decide how much of the digital currency can and will be injected into the economy and it leaves them exposed to debasement.

CBDC are Centralized, it is the central bank that is ultimately accountable for its issuance and for its use, but unlike cash, CBDCs are traceable. This means that central banks can know who you are and exactly how you are spending your money.

Countries all over the world are already running experiments with Digital Currency. China is way ahead of the pack in this respect, having already issued the first batch of digital Yuan into the economy as a way of testing and tracking how its citizens would use it. 

The Euro zone is already preparing itself to pilot a digital version of the Euro, the US has announced plans to launch a Digital Dollar in the next years and lately the United Kingdom announced its plans to launch Britcoin, the digital version of the British pound.

According to The Economist, it is estimated that by 2025, 1/5 of the world population will live in a country with some form of digital currency

So you may be wondering, what’s the big deal? many countries around the world have been transitioning towards cashless societies and more and more people are now paying digitally with their mobile phones. 

Well you see, Digital money is not only 1s and 0s representing how much money you have in your bank account. Digital money is also programable money. this means that when combined with lines of computer code known as smart contracts, money will become “intelligent” 

Think for example about your car. In the future cars will be connected to the internet, and you will be able to download an app onto it that through the use of a smart contract, will make automated road tax payments based on how much you drive. Similarly, your home appliances will connect to the internet and will be able to execute payments straight from your digital wallet, which will also enable the creation of new pay-per-use business models. And even your travel insurance will automatically compensate you whenever your flight is cancelled or delayed.

But programable money could also be very limiting. To incentivise spend, the central bank could set an expiry date on your digital money. It could also limit the places where you may spend it, by working only on state approved stores. Similarly it could also restrict your freedom of buying certain products or services. 

Think about sustainability goals, Digital money could limit the amount or the frequency with which you buy meat and other products that the government considers to be sustainability unfriendly.

Whats more worrying is that digital money, especially CBDCs, when combined with social credit score systems like the ones already in operation in China, could literally set digital boundaries on where and how you spend your money depending on your social score.

There is a real risk that what starts with good intentions, like convenience, inclusivity, accessibility and equality; could very easily become an authoritarian mechanism for control. Which is why I think it’s important that as we venture into this brave new era of money, we make conscious efforts to have the necessary public debates that will ensure that these systems preserve values that as society we all find important. Virtues like privacy, equality, liberty and freedom will only be carried through our emerging systems of trust, if we make a conscious and informed effort to preserve them.

Chris Crespo
Chris Crespohttp://nordicfintechmagazine.com
Chris is the Co-founder of Fast Forward Banking, a Financial Media agency that seeks to bust the jargon out of banking. As a behavioural economist he enjoys exploring questions that challenge conventional thinking. He is fascinated with innovation and technology and its intersection with financial services, society, and culture. Chris is also a guest lecturer at Stanford University and Singularity University where he teaches regularly on the Future of Financial Services, the Future of Money and the Disruption of our current Banking and Monetary Systems.

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