by Kabir Sehgal
Greco believes that a new era is here, one in which technology provides the tools for a digital, alternative currency, combining all the existing corporate currencies or creating a system that links all the regional barter communities or credit-clearing exchanges. These exchanges are business groups that extend credit to each other to facilitate transactions among the community. It’s not unlike what happens today with digital transactions: Money isn’t physically changing hands, but the record of who owns it gets constantly updated.
Looking for a precedent, Greco points out that the US Postal Service monopoly in letter carrying didn’t prevent the rise of email and text messages. He highlights several technologies that may be a threat to the government and banking monetary monopoly: social networking, peer-to-peer credit clearing, systems that evaluate counterparty reputations, and encrypted and secure systems.30 Already start-ups like Lending Club, an online peer-to-peer lending company, have originated more than $2 billion in loans, with only a 3 percent default rate.31 These are loans determined not by bankers but by the community. Greco makes the case that technology can scale monetary networks like never before:
Will eBay or Amazon be able to exploit this opportunity…? The past three decades have seen great progress in the development of private commercial “barter” or trade exchanges that provide direct credit clearing among their business members. Optimizing their design, putting all the pieces together, and taking these networks to scale are the remaining tasks that will revolutionize money and banking and enable the evolution of civilization toward greater peace, prosperity, and sustainability.32
One of the most visible examples of how technology is redefining money is the digital currency Bitcoin. Created in the wake of the 2008 financial crisis by a person or persons with the pseudonym Satoshi Nakamoto, Bitcoin is a decentralized currency that leverages peer-to-peer connectivity. In order to make bitcoins, one must “mine” them. Mining is a process in which computing power is used to solve math problems, and to verify and validate transactions on a public ledger.33 It is unprofitable and untenable to use personal computers for mining anymore because they use up too much electricity without generating commensurate amounts of Bitcoin.34 Instead, many buy specialized mining hardware, and then they download software to start the mining process. Many join pools of other miners, thereby combining computing power and increasing the speed in which they attain bitcoins. Finally, one sets up a Bitcoin wallet to receive the Bitcoin that one has earned. Instead of mining bitcoins, one can also buy and sell bitcoins on several online secondary markets. There is a fixed amount of 21 million total bitcoins that can ever be created, and this won’t be achieved until 2140. The currency doesn’t rely on central banks but rather cryptography, mathematics, and decentralized authentication.
Bitcoin has seen early success. According to Bitcoin.org, the value of bitcoins in circulation exceeded $1.5 billion in 2013.35 Wall Street banks have written favorably about the currency. The foreign exchange strategy team at Bank of America Merrill Lynch writes, “We believe Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers. As a medium of exchange, Bitcoin has clear potential for growth, in our view.”36 Even Ben Bernanke, then head of the Fed, seems to have given a nod to Bitcoin. In a November 2013 letter to the US Senate, he writes:
While these types of innovations may pose risks related to law enforcement and supervisory matters, there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system. Although the Federal Reserve generally monitors developments in virtual currencies and other payments system innovations, it does not necessarily have authority to directly supervise or regulate these innovations or the entities that provide them to the market.37
However, it remains to be seen whether Bitcoin will have lasting power as a currency or fade away like other alternative currencies. It has experienced volatility in its price. In 2013, it seesawed from $20 to $266 and then $130 in just a couple of months. Nobel Prize–winning economist Paul Krugman cites this instability, saying that Bitcoin isn’t a firm store of value, something that money needs to be.38 Detractors say Bitcoin, like gold, is deflationary, unable to expand with growth, and could lead to currency famines in times of economic turbulence if it became a leading global currency.
Bitcoin also has a PR problem. In March 2014, Mt. Gox, a leading Bitcoin exchange, was hacked. It lost almost half a billion dollars’ worth of Bitcoin, which amounted to nearly 850,000 Bitcoin, or 7 percent of the entire circulation.39 In October 2013, the government seized 144,336 bitcoins valued at $28.5 million found on computer hardware operated by the creators of Silk Road, an online marketplace that accepted only bitcoins for various goods like books and illegal drugs. The former vice chairman of the Bitcoin Foundation, an organization that purports to safeguard the currency, was indicted for laundering $1 million in bitcoins on Silk Road.40 Already, the FBI possesses more than 3 percent of bitcoins in circulation.41
The government is the greatest impediment to the widespread adoption of Bitcoin. Thousands of years of monetary history show that issuers want more control over the money supply, not less. Only a few months after Ben Bernanke’s letter, in March 2014, the IRS stipulated that, in terms of taxes, Bitcoin will be treated as property and not currency. According to Bloomberg, “Purchasing a $2 cup of coffee with bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of gross income for the coffee shop.”42 Keeping track of the capital gains is inconvenient and an impediment to the adoption of Bitcoin. Dollars are fungible in that one $10 note can be used in place of another. But the IRS limited the fungibility of Bitcoin because you have to consider the tax implications of using every bitcoin.
The point is that the United States is asserting its monetary power—curbing and controlling the use of Bitcoin. And so are other countries. At first, Chinese monetary officials tepidly supported the participation of its citizens in the Bitcoin marketplace.43 BTC China was one of the largest Bitcoin exchanges in the world. However, in December 2013, the Chinese central bank cautioned payment processors not to use Bitcoin. It threatened to reprimand banks that were involved in Bitcoin transactions.44 As a consequence, BTC China’s Bitcoin trading volume declined 80 percent.45 The failure of traditional monetary institutions would likely happen only during an emergency. Only then, during the bear case, could Bitcoin spread in an unimpeded manner. And even then, electricity and digital networks are needed for Bitcoin to flourish.
But all this discussion of Bitcoin as a currency misses the greater point of recognizing it as a technology. On a recent trip to San Francisco, I met with a friend who runs a company that trades Bitcoin. He put it to me simply: “Even if Bitcoin fails, it can be a success.” He then geeked out on me: “Bitcoin isn’t just a currency, it’s a protocol,” he stated. A protocol is a set of rules that guide how data should be exchanged among computers. For example, the “http” at the beginning of a website address stands for “hypertext transfer protocol,” which lets your Web browser, for example, Google Chrome, talk to a Web server located in California.
Historically, digital currencies have been plagued by the double spending problem: Digital currencies can be easily duplicated, which leads to fraudulent transactions. The Bitcoin protocol, in the words of an economist at the Chicago Federal Reserve, is an “elegant solution” to this problem.46 In short, the Bitcoin protocol enables a digital item, like money or a music file, or any item that can be represented digitally, to be transferred, not copied. Venture capitalist Marc Andreessen explains the significance of this:
Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer… What kinds of digita
l property might be transferred in this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds… and digital money.47
He provides a thought experiment in which you own a car, and a key that opens it that is activated by your mobile phone. Let’s say that you sell the car. Immediately the ownership of it is transferred to the person who bought it, and the key on your mobile phone no longer can open the car, as it has been updated to reflect the new owner.48
The way this verification process works is that all Bitcoin transactions are stored in an Internet-wide public ledger known as a blockchain, which, once edited, cannot be amended again. There’s more to this technology, but, in essence, this decentralized network authenticates all Bitcoin transactions.49 The implication is that you don’t need a centralized party like a bank or brokerage to validate the legitimacy of whatever is being transferred.
Instead of diving deeper into the technology, let’s look at the big picture—where Bitcoin and digital currencies fit in the evolution of money. It is worth recognizing how digital technology facilitates both hard and soft monetary systems. Lest we forget, the US dollar is also a digital currency that can be traded without being converted into physical form, although electronic transactions in dollars will be cleared through the banking system. But now modern metallists have something to cheer as Bitcoin’s parameters prevent unlimited currency expansion—even if Bitcoin doesn’t have intrinsic worth. Admittedly, the currency is still in its infancy, but metallists need not decry virtual currencies, even if they find themselves bizarrely aligned with “anarcho-technologists who distrust the government authority and believe in the power of distributed networks.”50
Alternative digital currencies may be the future of money. But it’s hard to see widespread adoption in a way that threatens the major fiat currencies, because the US government can decree what is or isn’t considered legal tender within its borders, just like President Roosevelt did when he banned the hoarding and use of gold. It’s more likely that Bitcoin will prevail as a technology that enables the transfer of anything of value such as deeds, titles, or even the movement of other currencies like dollars.
Even if the bear case was realized and global monetary institutions failed, another of the five ideas that I discussed may be adopted: a return to metal money, increased usage of cash, bartering, money as a public resource, and alternative currencies. Or it might be something else entirely.
The Bull Case
I don’t like coffee. I much prefer tea: Darjeeling blended with Assam. That’s why on my recent trip to San Francisco I initially resisted my friend’s suggestion, more like a demand, that we visit Blue Bottle Coffee. We arrived at the café, located in Mint Plaza, and joined a scattered line of customers waiting to be served. The café has a trendy, bare aesthetic with vintage equipment, like a San Marco lever espresso maker. Customers sip their slow-dripped coffees while they read TechCrunch on their iPads and calmly debate recent trends in typography. One of the mustachioed baristas asked for our order.
“Two New Orleans iced coffees, please,” requested my friend.
Mmmmm. The coffee was soft, chilled, and hit the spot on a temperate summer day. Further adding to my enjoyment (and convenience): Neither of us had to take out our wallets. My friend used Square, the digital payment system that lets small merchants accept credit card payments and enables customers to buy products by using their mobile devices. Sounds like something out of the future. But the future is already here. The technology is simple and revolutionary, something one of the company’s founders, Jack Dorsey, a cofounder of Twitter, has a knack for. But it has also proven to be ephemeral, as Square has since shuttered its “Wallet” application, which enables people to pay using their mobile phones, due to lack of adoption.51
Nevertheless, convenience has proven to be an impetus of monetary innovation: from silver bullion, silver coins, silver-backed paper, to silver-colored phones. Square seemingly demonetized the transaction and removed the friction of cash and the experience of paying altogether. Not seeing money probably minimizes brain activity and the fear of spending (or losing) money. Indeed, some technology companies have gotten into trouble for making it too easy to buy items. Apple settled a class action lawsuit of up to $100 million brought against it by parents whose kids had racked up huge fees while playing games on iPads. For example, one girl bought $200 worth of virtual items without being asked for a password, since her parents’ credit card information was on file.52
It’s difficult to know whether Square, or one of its competitors like PayPal, Google, or Apple, will be the dominant mobile payment company in five or fifteen years. For example, in the early 2000s, there were hundreds of payment start-up companies, and arguably only PayPal has survived and reached mass consumer adoption. Nowadays, however, while the companies themselves may be in doubt, the technology they are leveraging is not likely to be. Square and its competitors are revolutionary because they turn the mobile phone, pervasive from Union Square to Tahrir Square, into a payment device, and expand the number of buyers and sellers in the global marketplace.
But before examining how mobile telephones are reshaping commerce, it’s important to recognize the distinction among money, payment device, and payment network. My coffee was paid for in dollars (as the currency) using Square Wallet (as the mobile application) through the Visa credit card payment network.53 To better understand the bull case, let’s focus on the payment technologies that are crucial now and will also be integral to the future of money especially in the developing world: the credit card and the payment networks.
Looking to the future by revisiting the past is exactly the opposite approach taken by Edward Bellamy, author of the science-fiction book Looking Backward: 2000–1887 published in 1887, the third-bestselling book of the nineteenth century, after Ben-Hur and Uncle Tom’s Cabin. The plot concerns a man named Julian West, who falls asleep and wakes up more than one hundred years later in 2000. He encounters America as a socialist utopia in which people work fewer hours and retire at age forty-five. People use “credit cards,” which are more like debit cards linked to someone else’s bank account, to purchase items at a local store.54 The cards draw upon a share of the government’s wealth, which is distributed to each citizen. Money has become, as Mellor envisioned, a public good.
The creation of the credit card is a case of real life imitating fiction. It wasn’t until the 1920s that cards were introduced by oil companies and hotel operators to facilitate customer transactions, but they couldn’t be used elsewhere. In 1946, more widely accepted cards were introduced by Flatbush National Bank in Brooklyn, with its “Charge-It” card.55 In 1950, a better-known card, the Diners Club card, was an outgrowth of an embarrassing experience of its creator, Frank McNamara, who didn’t have enough cash to pay for dinner one night. In just two short years, there were twenty thousand cardholders. American Express and Bank of America followed suit by introducing cards in 1958. American Express garnered more than one million cardholders in its first five years. By introducing its card in California with its massive population, Bank of America obtained a sizable user base, and other banks joined their credit card network, which was later renamed Visa. In the late 1960s, the card that eventually became known as MasterCard was created by a group of banks to compete with Bank of America. The competitor card received a major lift when First National City Bank, later renamed Citibank, merged its card and joined MasterCard.56
Credit cards are convenient, widely used, and vital to the future of money in the bull case. Instead of carrying and counting cash, swiping a credit card (or entering its number for an online transaction) has proven incredibly expedient. In 2013, there were more than 160 million cardholders in the United States, with 1.1 billion cards, purchasing more than $3 trillion in volume, which translates to about 19 percent of GDP.57 Visa alone processes nearly 50 billion transactions each
year.58 Purchasing volume jumps to $15 trillion when adding debit and prepaid card transactions.59 The people have spoken and spent.
The prevalence of credit card usage can be explained by several factors. In short, people like the benefits of increased and immediate spending power, even if that means borrowing against their future income. Credit cards present every user a Faustian bargain, as millions have racked up high amounts of debt they were unable to pay off. Of course, it didn’t start off this way. The credit card was one of the many instruments that democratized debt during the twentieth century. Policy makers crafted laws that helped low-income Americans access affordable housing loans, for example. The Equal Credit Opportunity Act of 1974 banned discriminatory lending practices, and the Community Reinvestment Act of 1977 directed banks to extend credit, in a prudent manner, to those in low-income areas.
In 1978 the Supreme Court ruled unanimously in Marquette National Bank of Minneapolis v. First of Omaha Service Corp. that state interest rate laws couldn’t be applied to banks that were chartered in other states. The deregulation of interest rates helped to spread credit cards to people with lower incomes. The governor of South Dakota, Bill Janklow, realized that states could export their rates: “If South Dakota had a 25 percent ceiling, then you could charge 25 percent, even to a loan in Florida.”60 Losing money with their credit card businesses, many large banks opened divisions in South Dakota, and later Delaware, because these states had lifted or eliminated interest rate ceilings. In exchange, these states benefited from thousands of new jobs. Banks determined their own credit card interest rates and applied them across the country. Because they could charge higher rates and spread the risk, banks issued credit cards to lower-income individuals. The credit card business became very profitable, and issuers continue to spend billions in advertising to attract new customers.61 Credit card companies have certainly engaged in unfair and harmful practices, charging sky-high rates and onerous fees. Nevertheless, the policy objective of democratizing debt helped to make this payment device, the credit card, ubiquitous in the United States.
