Professional critics of cryptocurrencies need to re-learn their history

One of the most absurd statements I’ve ever heard about cryptocurrencies came from one of the world’s foremost bankers. The head of the Bank of International Settlements, Agustín Carstens, was quoted as saying: “Young people should use their many talents and skills for innovation, not reinventing money. It's a fallacy to think money can be created from nothing.”

Now that’s rich, coming from a guy whose job it was, as a central banker, to create money from nothing every day. In fact money is, and always has been, created from nothing! Money is a human invention. Its value exists only in our imagination. It dates back more than two thousand years, but did not exist before people invented it. It was not handed down from on high, on stone tablets.

So, if money was invented by people, it can be reinvented by people.

This is a key point, because the idea of paper money being sacrosanct underlies so much of the criticism of cryptocurrencies. In fact, paper money is not sacrosanct. I like the way Bitcoin advocate Andreas Antonopulous puts it: Money is a language that we use to communicate value.

Way back in 1997, ten years before the advent of Bitcoin, and when the world was still using dial-up modems, anthropologist Jack Weatherford foresaw the rise of digital money in his book, The History of Money. He traces the history of money in three epochs:

• “commodity” money (e.g., bags of grain, cowrie shells, etc.) was the first epoch;
• “cash/paper” money, (i.e., fiat currencies issued by governments and managed by banks) is the second;
• “electronic” money (e.g., bitcoin, litecoin, ripple, etc.) is the third era we are entering now.

Listen to his extremely prescient words, from two decades ago:

Each of the two initial types of money created its own unique culture that differed markedly from all earlier ones. Now, at the opening of the 21st Century, the world is entering the third stage of its monetary history—the era of electronic money and the rise of the virtual economy. The rise of electronic money will produce changes in society as radical as far-reaching as the two earlier monetary revolutions caused in their own eras. The new money will make sweeping changes in the political systems, in the organization of commercial enterprises, and in the nature of class organization. Virtual money promises to make its own version of civilization that will be as different from the modern world as from the world of the Aztecs or the Vikings.

Get Over It: Our Built-In Bias Toward Cash Money

Last week we talked about the Internet of Money. This week, I want to build on that idea by turning the concept on its head, and talking about the Money of the Internet.

Our built-in bias toward paper money systems is one of the biggest obstacles to embracing this idea. It leads critics to overemphasize the flaws in emerging digital money systems, rather than seeing those flaws as growing pains.

Yes, our emerging money language is rudimentary, so far. Cryptocurrencies have trouble meeting three key tests for “money”: a store of value (hampered by volatility); a medium of exchange (you can’t yet spend it everywhere); and a unit of account (nothing priced in crypto, except other crypto). Also, it only bears some of the hallmarks of “sound” money—i.e., being fungible, divisible, secure, portable, etc.

But all those kinks are being worked out as we speak. In this blog we’ve talked about how you can access cryptocurrencies at ATMs in Switzerland; you can use can them at every vendor in the Brisbane airport in Australia; and rewards points issuers like Amex are inching toward making their points programs more cash-like by putting them on a blockchain2.

The Lightning Network is growing by leaps and bounds, helping to address scalability issues that have slowed the adoption of bitcoin for retail transactions. The crypto exchange Coinbase, and crypto wallet firm Blockchain, have both launched custody solutions for institutional investors. IBM is leading a consortium of banks toward blockchain-based cross-border payments in Asia, using the Stellar cryptocurrency network. The crypto exchange Binance accounced recently that its user base quadrupled from 2 million to 10 million in less than a year, and the firm expects to make a profit of $500M to $1B this year.

Today, the infrastructure of an Internet of Money is being built. The medium of exchange, in that world, is the Money of the Internet.

Looking at the world this way, it’s quite easy to define bitcoin as a language we can use to communicate value over open networks, like the internet. It’s also now very easy to see how money can be created: if we create a useful language that communicates value, then we have created money. The more people use this language, the more important the language becomes.

WHAT DOES MY 2CENTS ADD UP TO?

To appreciate the importance of the changes we’re living through, right now, one has to give up the belief that paper money systems are sacrosanct. They are not. A dollar bill has about as much intrinsic value as a cowrie shell and much less intrinsic value than a bushel of grain. And to directly address Agustín Carstens’s point: there is hardly anything more innovative that young people can do today than reinvent money.

That reinvention is happening. The technology is gaining ground. Bankers at the center of today’s global financial order, who cannot imagine themselves being displaced, cannot will it away through denial.

In my view, bitcoin is likely to serve as the monetary base of the internet. That would make bitcoin both The Internet of Money and The Money of the Internet. If you are looking only one side of this coin, then I suggest that you’re not seeing the full picture.

As cryptocurrency ecosystems grow and become more institutionalized, I believe that derivatives and other modern financial tools will eventually help reduce volatility to a level we’d expect from traditional currency markets. Greater retail adoption would follow from stable markets for “sound” digital money, with cheap, efficient payments channels built on top. Pricing of goods and services in these now-stable cryptocurrencies would become easier and more standardized.

But here’s the rub. If you’re an investor waiting for the day when the Money of the Internet looks like the cash money of today, then you will have waited too long, in my view. Once these systems are fully developed and in use everywhere, all that past growth will have been priced in already. There will certainly be incremental investment opportunities, but they are likely to be a lot less interesting.