If money is ‘the most successful story ever invented by humans’, as Israeli historian Yuval Harari tells us, then the narrative is about to take a fantastical turn.
That’s my take-away from David Birch’s new book, ‘The Currency Cold War’, a wide-ranging, thought-provoking survey of the technology and geopolitics of money.
Three forces—powerful hardware in the form of modern mobile phones, digital social networks and strong authentication technology—are combining to revolutionise the way we buy and sell, says Birch.
In future, he predicts, digital wallets on our phones will perform complex, automated conversions between the hundreds or even thousands of currencies we are each likely to own.
Our mobiles will select the money unit we need for each purpose—whether it’s for saving, spending, purchasing goods or services or paying taxes.
“Smart money knows whether it was held by a sweatshop or money launderer”
Future currencies may be local or global in reach, says Birch. They may be issued by governments, companies or local communities, but they may also be backed by nothing more than mathematics (like bitcoin, which is secured by the energy spent on running cryptographic algorithms).
Our money will be smart, says Birch, meaning it will be capable of being programmed to perform particular tasks. For example, local community money might be designed so it couldn’t be used by outsiders. Money could also be used to demonstrate its own history.
“Smart money knows whether it was held by a sweatshop or money launderer,” says Birch. “It has significant information content.”
Birch reaches an optimistic conclusion from this technological change.
He says smart money could invert Gresham’s law (the observation by a 16th century English financier that good money disappears from circulation in the presence of coins that have been debased by the dilution of their precious metal content or by clipping).
“The money of the future might be smart enough to preclude its use by criminals,” Birch suggests.
The idea that the inherent traceability of digital money could be used for particular societal goals is anathema to some.
The libertarians who have had a strong impact on the development of cryptocurrencies regard transaction privacy as non-negotiable, even though the jury is still out on whether one unit of bitcoin is always the same as another.
As cash disappears and national currencies become digital, Birch suggests that those wanting to have fully anonymous transactions might have to pay for it through negative interest rates (i.e., by accepting a steady rate of depreciation in their holdings of ‘dark’ currency tokens), while ‘light’ tokens—those whose history is open to inspection—could earn a positive rate of interest.
“Good behaviour will not be gamed and bad behaviour will be on display”
The invention of smart money will also lead to wholesale changes in the way financial markets operate, Birch predicts.
We could be saying goodbye to shares and bonds in their current form, he says, as well as to a host of centralised infrastructures, like stock exchanges, clearing houses and securities depositaries. We may even have to unimagine things like dividends and interest payments.
Instead, says Birch, companies will issue their own digital tokens (private currencies) in bearer form, exchangeable for future goods and services.
The idea of tokenising future commercial activity could help finance a range of start-ups, he says.
“A wind farm start-up might offer money in the form of kilowatt hours that are redeemable five years from now,” Birch writes.
“In the early days, this money would trade at a significant discount to account for the risks inherent in the venture. However, once the wind farm is up and running, the value of the money might rise.”
The issuance of private, programmable digital money could have other significant benefits, says Birch, notably by making it harder for those in possession of insider knowledge to exploit those who are less well-informed.
“With reputations depending on an immutable history of participations in transactions, good behaviour will not be gamed and bad behaviour will be on display,” says Birch.
“Market participants will be able to assess and manage risk, and regulators will be able to look for patterns and connections. I will be able to see your assets exceed your liabilities without necessarily being able to see what those assets or liabilities are,” he says.
We’re entering into an era of ‘ambient accountability’ and ‘translucent transactions’, says the technologist, offering us an opportunity to remake markets in a better way.
“Brands will become meaningless”
Specifically, he says, in future people won’t be able to write a smart contract (an application resting on top of programmable money) that’s beyond the bounds of regulation. The roles of auditor and compliance officer will merge and the only regulators worth having will be data scientists.
“Brands—the industrial age’s mass-market substitute for incomplete information—will become meaningless,” Birch predicts.
China threatens dollar dominance
But the arrival of smart money is also upsetting the geopolitical status quo, says Birch—hence the title of the book—and specifically by empowering China, whose global belt-and-road infrastructure initiative already encompasses over 80 countries.
Birch cites a 2016 warning from former US Treasury Secretary Jack Lew that his country’s overaggressive use of financial sanctions could result in a shift in business activity away from the US and a decline in the dollar’s role as the preeminent global reserve currency.
China’s ongoing progress towards its own state-backed digital currency represents the principal threat to dollar dominance, says Birch, especially if the new digital yu’an becomes accepted worldwide.
“An average street trader in Africa may soon find it more than a little convenient to order goods from a Chinese partner via [Chinese social media app] WeChat and settle their debts via Alipay [another app]. And if they can settle instantly using their Chinese digital currency, they may soon find themselves accepting the same in payment,” Birch says.
To address the potential fallout from what he sees as an inevitable currency cold war between the two superpowers, Birch calls for other countries to make haste in developing a global identity infrastructure.
This, says Birch, could enable the launch of new digital trading currencies in competition with the current dollar-based system, but also pre-empting possible future Chinese dominance.
As Coindesk’s Michael Casey writes in the foreword to ‘Currency Wars’, it now seems almost certain that we are undergoing one of the more dramatic plot shifts in the millenia-long history of money.
As money is so central to the way societies operate, the arrival of programmable digital currency could well uproot our political systems as well as our economies. David Birch’s book is an invaluable guide to what might lie ahead.
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