Alex Floate, a member of our Emerging Fellows program examines the concept of cash in a global digital economy through his fifth blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
Adam Smith suggested over two-hundred years ago that all money is nothing but a matter of belief. Even with the complexity of today’s economic and monetary systems, it still appears that Smith was right. We believe money has value and that value will be accepted by others. Even commodity-based money systems, such as the gold standard, relied on belief that the commodity is of value and exchangeable for other goods or services. Belief, value and trust is what composes our money.
Currently governments serve the function of guaranteeing trust that money is worth the face value printed on it. That as legal tender it is exchangeable for other items of value. This trust and value placed in currencies is based on the belief of the economic and political stability of the country. Some currencies, such as the US Dollar have greater belief entrusted to them and are used more widely than others for both legal and illegal transactions; the USD accounts for more than 85% of currency conversions on any given day. Despite predictions of impending doom of the US Dollar due to quantitative easing during the 2008 recession, those moves by the US Treasury bolster the status of the dollar as it demonstrates the willingness of the government to protect the Dollar based economy.
Exchanging money can be simple when the other person is standing in front of you and can be easily handed the preferred legal tender. Try to transact across distance, or with large sums, and gatekeepers to the money will necessarily become involved. These include the treasury that issued the money and create the rules for the currency, the banks or institutions that will carry out the transaction, and the institution that receives or sends the money depending on whether you are the buyer or the seller.
Each of these institutions, in addition to having the mechanisms and expertise to conduct the transaction, are also part of the trust mechanism that ensure the belief in the currency remains intact. However, all these gatekeepers create friction in the system that increase the costs of transferring value. Technology can be key in removing those frictions, but current financial interests who profit from this friction will do their best to maintain the status quo. Smokescreens that create the illusion of digital currency will become more common, but the call will most likely remain for the US dollar to remain the universal currency.
But in a global digital economy who will be the new gatekeepers? Though legal tender is the property of the issuing country, value stored in the money is not the property of the government. Value can be exchanged by other means, such as digital currency or credit in exchange for value. A future where Alibaba or Amazon trade in their own currency, with employees and contractors exchanging their value for credits on account, is not that far outside the realm of possible.
A threat to both traditional means of exchanging value and potential new universal currencies are the rise of nationalist and tribalistic movements across the globe. If these movements win out physical and digital borders will become hardened, networks will be splintered, and markets fragmented. In this situation where will innovation come from, and how will value be held and exchanged? Those organizations and individuals with technical knowledge and savvy will be in the best position to navigate and profit from this situation. Those outside of this group may find themselves with either diminished ability to easily transact with the new digital currency or be at the mercy of a new set of gatekeepers, who have ‘digital collars’ instead of white ones.
© 2019 E Alex Floate