What defines a currency?
By Naoimh Reilly
Money is everything; most of us want it, we all need it and it’s become associated with success. But how did we become so obsessed with something that is tangibly worthless? Some people worship it, as if it were a God.
People have been exchanging goods for the last 10,000 years. They found this was a much safer way of getting what they needed without having to go into battle for them.
The barter system was used to exchange livestock and grains but as farming became more commonplace, some societies began using tokens which resembled coins. Some had pictures of the items they were exchanging, to act as a reminder of what was owed. Then came gold, along with other precious metals and coins began to follow.
According to historians, the first standardised coins came from Turkey around the 7th century BC and it eventually spread across the world. But in the early Renaissance period in Europe, transporting increasing amounts of coins was risky. Governments and merchants began making transactions with promissory notes. This was the first type of paper currency, which led to cash notes.
There is nothing inherently valuable about currency or money; it has value because we decide it does. Money is about exchanges and transactions that we have with one another. It's about a collective story we tell each other and agree upon. It's a powerful concept.
Most transactions now are digital and don't involve transferring cash or coins. It’s simply changing a code in a computer. You can buy something from the other side of the world in seconds. These entries in databases belong to banks and other financial organisations.
What if we could remove the need for traditional banks in transactions? These transactions, which we have little control over, are what can cause friction with money.
Are these traditional banks standing in the way of innovation? Most banks and institutions don't inter-operate and this can cause more difficulties and friction.
Transaction costs go up and become more complicated. With physical money, we rely on the speed of humans. Digital money arrives fast but we're at the mercy of the gatekeeper institutions. Traditional banks are slowing us down; we are outgrowing them and our needs are more complex - a complexity that most banks have failed to grasp.
What will the new phase of money be? Is the new money programmable and reliant on third-party institutions? How can we make it secure without using traditional banking? The ideal would be for money to safely and securely move without the need for third party institutions.
Cryptocurrencies are only the first step in this digital revolution - money not driven by governments and banks, intermediary-free money. Bitcoin is the most famous but there are others, such as Litecoin, Ethereum and Ripple.
What they all have in common is cryptography. Cryptography is the key and is the basis on which Blockchain works.
What is next after Bitcoin? Global programmable money? Bitcoin is slow, hard to understand and tricky to use. But the next generation of cryptocurrency will be better, faster and easier to use.
With every new digital revolution, there are winners and losers. Who will gain the advantage in this new world? Programmable money has the potential to push innovation and democratise money. With this comes trust. Trust is fundamental with transactions and currency.
The question for the future of cryptocurrency lies in trust and in its credibility. We will have to take a ‘trust leap’.
A trust leap is something new and different. We have stopped trusting institutions and have started trusting complete strangers. We can see this shift with successful companies such as Uber and Airbnb.
Trust has helped humanity move forward for generations. We have always had a confident relationship with the unknown. The first time we used a Visa card and an ATM, we had to trust that it would work.
Trust is elusive, yet we depend on it. We automatically do a risk assessment for most things, we depend on this for our own lives to function.
Trust is the society’s social glue.
Trust used to be built on close relationships; it was local and based on accountability. If we didn't honour this trust, everybody would know and nobody would deal with us again. It was in our own interests to be trustworthy.
Then there was institutional trust, where bankers didn't know us personally but relied on regulations, contracts and insurance.
However, many of these institutions unapologetically let us down. The trust we had in them has been steadily declining for many years. Just look at the Catholic church, the great financial crisis of 2008, the Panama papers and the likes of the Volkswagen emissions scandal - all of these lessened our trust in institutions. Very few people involved in these scandals ended up being held accountable; barely any have gone to jail. Is it surprising we're now looking for alternatives?
We want more open and transparent dealings with others. The concept of trust is being turned on its head.
We are moving away from institutional trust and heading towards distributed trust. It will no longer be top-down but inclusive and accountability based.
Trust is the basis for currency and the future of currency will rely on this heavily.