Updated: Sep 5
The Future of Finance
In 2008, something began happening. Something very big indeed.
Lehman Brothers – at that point the fourth-largest investment bank on the planet – collapsed. This did not happen overnight, of course. There were a number of different warning signals and red flags that were missed, downplayed, or downright ignored, on the way to this disaster. But the collapse proved a shock to most who watched it unfold.
A bank – especially a bank like Lehman Brothers – is not supposed to just collapse. In fact, it cannot collapse. It cannot be allowed to.
Except, it had been allowed to. And it did.
This was unprecedented in living memory, and it was not the end of this troubled tale. Even after the world had been lifted back out of recession, the ghosts of those worrying times still lingered. In the United States, multiple stages of quantitative easing sought to reinvigorate the economy with large cash injections. Central banks purchased bonds and assets, increasing the flow of the dollar but risking its devaluement. Elsewhere, Venezuela entered a period of hyperinflation in 2016, which hit 10 million percent in only three years.
Money – and the way we approach money – has changed. And not for the better.
Real alternatives to traditional banking and monetary systems
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At around the same time as the Lehman collapse, the enigmatic Satoshi Nakamoto launched a white paper named Bitcoin: A Peer-to-Peer Electronic Cash System, followed by the famous crypto-network itself. As one financial giant died, another was being born, and the landscape of finance and commerce changed forever.
Now, almost 12 years later, we are used to hearing of "alternative lenders" and "fintech disrupters," and we have renegotiated a cautious relationship with the big banks. Cryptocurrencies are still going strong, yet the vast majority of us prefer fiat currencies, almost exclusively.
So, what's the deal here? Why is the general public so reluctant to embrace cryptocurrency in this way? And is cryptocurrency really better than fiat currencies? We believe so, and here's why.
What makes cryptocurrency such a viable alternative? The traditional points of value
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What do we expect from our currencies – from the money we use on a daily basis?
Well, to begin with, it needs to be fungible. In other words, we need to be able to trade it for goods and services of a set value.
Next, it needs to be non-consumable. Many of us place a great value on chocolate, but we can only enjoy this value by eating it. Then, no more chocolate. This is one of the reasons chocolate coins are not legal tender.
It must also be portable. It has to fit into a wallet after all. It should be durable. How will it survive for years in a bank vault if it is not robust enough to stand the test of time? We also need currency to be easily divisible, which is why we have dollars and cents for more precise transactions. Security is key, as well. How can we trust our money if it is vulnerable to fraud?
Finally, it must be easy to use in a transaction – i.e., it must be universally accepted, needed, and therefore valuable – and its supply must be predictable (this is why the government cannot just print money).
So, we have eight points here.
Now, let's consider how two things that are generally considered to have a lot of value stack up when measured against these points: the US dollar and the commodity of gold.
Both gold and the dollar can be exchanged for goods and services, and so pass the first test.
Neither are consumed after the transaction, and so pass the second test.
Gold is pretty heavy, but even in low quantities it has value, so it can still be considered portable.
Gold is very durable, but banknotes are not. They can and do become damaged or destroyed, causing problems.
Divisibility: Provided you can measure out a sufficient amount, gold can be divided, but it is not easy to do so. Dollars can be divided only if you have the exact number of cents needed to break the dollar.
Fraudsters can counterfeit gold relatively easily. Dollars can also be, and are counterfeited. Both commodities can also be easily stolen, with little means of tracing them to their original owner.
Dollars have a universal value, at least in the States, but gold? Well, not every barista will be too thrilled if you try to pay for your morning mocha with a few flakes of the precious metal.
And how about predictability? Well, who knows what the supply of the dollar will be in a couple of months, never mind a couple of years? Gold is a little steadier, but it is also prone to fluctuation in supply.
How does Bitcoin, or another cryptocurrency, fit in here?
It scores well across all the categories. It's fungible, non-consumable, etc. etc., all the way through to transactable and predictable. It is highly secure because of the immutability of the blockchain we discussed in an earlier article, and it is predictable, thanks to the steady release of tokens onto the network.
In other words, it ticks all the boxes.
What makes cryptocurrency such a viable alternative? New approaches to value
The advent of the blockchain has introduced other traits to the mix. These are:
Decentralization - In other words, is the network and the transaction record "owned" or controlled by a particular entity or set of entities?
Programmability - Can the currency be programmed to represent a particular asset or value?
Sovereignty - Is the currency issued by the state?
Following the same angle as in the previous section, let's take a look at how our assets measure up:
Decentralization: It's difficult to decentralize a bar of gold. This gold is likely to be held in a secure vault, which someone, or some group of people, is able to access. Fiat currency is the same – the banks have the ultimate control. Even if your savings are stuffed under a mattress, there is no escaping centralization.
Programmability: A piece of gold is a piece of gold. It can be shaped into a piece of jewelry or an ornament, but it cannot be programmed. Similarly, fiat currency can be collected together in a way that represents a certain value, but it cannot be programmed to represent a specific asset.
Sovereignty: Gold is not issued by the state. It may be owned and controlled by the state, but it is not issued as a representation of a currency. Fiat coins and notes, on the other hand, are, and have been, for millennia.
And how does a cryptocurrency measure up under these criteria?
Well, we have already explored the decentralization element of cryptocurrency. There is no single owner, and the copies of the blockchain are stored across each and every user node, so there is no chance of co-option. Hash codes and proof of work protocols reinforce this decentralization still further.
Programmability is something that comes naturally to a cryptocurrency, and actually brings us to something very interesting indeed, which we will discuss later: smart assets.
As you may have noticed already, cryptocurrencies are not issued by the state. It would be difficult for cryptocurrencies to be issued by the state in their current form without giving up some of their neutrality and decentralization.
Perhaps it is this final element, sovereignty, which is in fact the only criterion in which cryptocurrency does not beat the others hands down, that explains the public's reluctance to accept cryptocurrencies as true alternatives to fiat payment systems. It could be that we are just so used to having US dollars and Canadian dollars and Mexican pesos and British pounds and Japanese yen that we just can't imagine a system without these state-supported currencies. Again, this is something we'll be looking at in more detail later on.
Smart assets: Exciting potential for cryptocurrency
We've established that cryptocurrencies defeat their fiat rivals across almost all of the major battlegrounds. But we have only touched on one of the most important battlegrounds of all: programmability.
Let's say Person A – we'll call him Alan, for ease's sake – has a car to sell.
Person B – Becky – wants to buy that car.
Alan values the car at $4,000.
Becky says she can pay either in cash or in gold, and that she will use the current market value of gold to decide how much of the material to give to Alan in exchange for the car.
Alan sensibly opts for cash.
What happens next? Well, a few things can happen.
Becky can visit Alan and pay in cash, or she can transfer the cash directly from her bank.
Or Alan can deliver the car to Becky and ask her to pay for the car in installments.
Either way, the transfer of the asset (the car) and the value (the money) do not occur simultaneously. This can cause problems, say if Becky decides the car is not worth the asking price and holds out on installments, or if Alan finds the amount handed or transferred to him to be unsatisfactory.
OK, now let's move on to example two. It's Alan again, but this time Alan is a recording artist. He has an asset, which, in this case, is the rights to his latest song. This time, it is Person C, record company executive Caroline, who wants to make the purchase.
Caroline offers to pay in Bitcoin. Alan is happy with this.
He programs the song rights into a smart asset, which is a cryptocurrency token designed to represent a specific property of the user. Built into this smart asset are the conditions required to secure transfer, including the amount in Bitcoin.
Caroline meets the asking price and triggers the transfer. Alan receives his money immediately. This is the beautiful potential of a crypto transaction.
"Ahhh," you may say, "but that would never work in the original example, with something big and bulky like a car!"
Well, why not? Why shouldn't it work? You could still program a smart asset so it represents the ownership of the car. Then, when the transaction is indelibly written into the blockchain, the asset transfer is recorded along with it. The smart contract cannot be tricked or defrauded, and neither can the blockchain, so why should this transfer not be enforceable in a court of law?
The potential applications of this are numerous, and smart assets could usher in a whole new way of doing business. If only they could gain the love of the general public.
The barriers: What is standing in the way of cryptocurrencies?
So, the banks fell, and the world slipped into recession. Then, steadily, it rose again and a new landscape emerged – a landscape of fintech, and crypto, and alternative lenders, and smart assets, and blockchains... and...
And... what's the holdup? Why are so many consumers still reluctant to make the move towards crypto tokens, leaving behind the fiat system?
There are a few reasons, and all will need to be overcome if we are to truly bring about this new landscape of payment and money management.
Trust in the banks has been dented, but it has not been destroyed – We all still have bank accounts, we all still place our trust in these big institutions. Yes, we have become more savvy as consumers, but we still need the pace of disruption to accelerate. We still need these up-and-coming alternatives to really step up to the plate.
Fiat currencies still run the world – Dollars, pounds, euros, yen, yuan, roubles; these words still dominate the world stage. We still get paid in fiat currencies issued by the state. Until this status quo can be disrupted, it will serve as a huge obstacle for alternative currencies.
Many are still distrustful of cryptocurrencies – Too many members of the public still do not fully trust Bitcoin and other cryptocurrencies.
There is much misinformation fueling this distrust – This opinion is being hardened by the sheer amount of less-than-positive, and less-than-honest, information that surrounds crypto-networks.
Together, we need to break down these barriers. Fiat currencies still have their role to play, but they have let us down again and again – we need an alternative. Cryptocurrencies offer that alternative.
Find out more about Cryptocurrencies and the Decentralised web at web.info.