If money is \u2018the most successful story ever invented by humans\u2019, as Israeli historian Yuval Harari tells us, then the narrative is about to take a fantastical turn.<\/p>\n
That\u2019s my take-away from David Birch\u2019s new book, \u2018The Currency Cold War\u2019<\/a>, a wide-ranging, thought-provoking survey of the technology and geopolitics of money.<\/p>\n Three forces\u2014powerful hardware in the form of modern mobile phones, digital social networks and strong authentication technology\u2014are combining to revolutionise the way we buy and sell, says Birch.<\/p>\n 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.<\/p>\n Our mobiles will select the money unit we need for each purpose\u2014whether it\u2019s for saving, spending, purchasing goods or services or paying taxes.<\/p>\n \u201cSmart money knows whether it was held by a sweatshop or money launderer\u201d<\/p><\/blockquote>\n 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).<\/p>\n 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\u2019t be used by outsiders. Money could also be used to demonstrate its own history.<\/p>\n \u201cSmart money knows whether it was held by a sweatshop or money launderer,\u201d says Birch. \u201cIt has significant information content.\u201d<\/p>\n Birch reaches an optimistic conclusion from this technological change.<\/p>\n He says smart money could invert Gresham\u2019s law (the observation by a 16th<\/sup> 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).<\/p>\n \u201cThe money of the future might be smart enough to preclude its use by criminals,\u201d Birch suggests.<\/p>\n The idea that the inherent traceability of digital money could be used for particular societal goals is anathema to some.<\/p>\n 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<\/a>.<\/p>\n 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 \u2018dark\u2019 currency tokens), while \u2018light\u2019 tokens\u2014those whose history is open to inspection\u2014could earn a positive rate of interest.<\/p>\n \u201cGood behaviour will not be gamed and bad behaviour will be on display\u201d<\/p><\/blockquote>\n The invention of smart money will also lead to wholesale changes in the way financial markets operate, Birch predicts.<\/p>\n 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.<\/p>\n Instead, says Birch, companies will issue their own digital tokens (private currencies) in bearer form, exchangeable for future goods and services.<\/p>\n The idea of tokenising future commercial activity could help finance a range of start-ups, he says.<\/p>\n \u201cA wind farm start-up might offer money in the form of kilowatt hours that are redeemable five years from now,\u201d Birch writes.<\/p>\n \u201cIn 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.\u201d<\/p>\n 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.<\/p>\n \u201cWith reputations depending on an immutable history of participations in transactions, good behaviour will not be gamed and bad behaviour will be on display,\u201d says Birch.<\/p>\n \u201cMarket 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,\u201d he says.<\/p>\n We\u2019re entering into an era of \u2018ambient accountability\u2019 and \u2018translucent transactions\u2019, says the technologist, offering us an opportunity to remake markets in a better way.<\/p>\n \u201cBrands will become meaningless\u201d<\/p><\/blockquote>\n Specifically, he says, in future people won\u2019t be able to write a smart contract (an application resting on top of programmable money) that\u2019s beyond the bounds of regulation. The roles of auditor and compliance officer will merge and the only regulators worth having will be data scientists.<\/p>\n \u201cBrands\u2014the industrial age\u2019s mass-market substitute for incomplete information\u2014will become meaningless,\u201d Birch predicts.<\/p>\n China threatens dollar dominance<\/p><\/blockquote>\n But the arrival of smart money is also upsetting the geopolitical status quo, says Birch\u2014hence the title of the book\u2014and specifically by empowering China, whose global belt-and-road infrastructure initiative already encompasses over 80 countries.<\/p>\n Birch cites a 2016 warning from former US Treasury Secretary Jack Lew that his country\u2019s overaggressive use of financial sanctions could result in a shift in business activity away from the US and a decline in the dollar\u2019s role as the preeminent global reserve currency.<\/p>\n China\u2019s ongoing progress towards its own state-backed digital currency represents the principal threat to dollar dominance<\/a>, says Birch, especially if the new digital yu\u2019an becomes accepted worldwide.<\/p>\n \u201cAn 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,\u201d Birch says.<\/p>\n 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.<\/p>\n 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.<\/p>\n As Coindesk\u2019s Michael Casey writes in the foreword to \u2018Currency Wars\u2019, it now seems almost certain that we are undergoing one of the more dramatic plot shifts in the millenia-long history of money.<\/p>\n 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\u2019s book is an invaluable guide to what might lie ahead.<\/p>\n Keep up with New Money Review content: sign up here<\/a> for our\u00a0newsletter<\/em><\/p>\n