Have you spent any money this week? You probably have, and it might have been by swiping or tapping a card, by shopping online, or via an internet transfer or a direct debit. You maybe even spent cash, handing over notes and coins and getting change in return.
For us in South Africa we could have also pointed our smartphone at a QR code and paid that way, using a service like SnapScan or Zapper. Or many of us might have transferred money via a mobile wallet too. Or perhaps you were travelling and didn’t think twice about paying for goods and services by credit card, or drawing foreign exchange from a local ATM.
The point is, that we don’t think twice about what happens behind the scenes for these transactions to take place. We don’t blink an eye when we’re halfway around the world from home, put our card into an ATM, have the correct amount of foreign exchange emerge into our hands, and have our bank accounts debited with the right amount, plus a few charges, obviously. All instantly.
It’s like writer Arthur C. Clarke said: “Any sufficiently advanced technology is indistinguishable from magic.” Except we don’t think of money as magic, it’s just there. Even for those of us working in the financial services space.
But maybe we should be thinking about money, or the processes managing its use, in a little bit more detail, given the dramatic and rapid changes that are coming. Consider that historian Yuval Noah Harari describes money as “the most successful story ever invented and told by humans”.
And it really is. Some of us may remember the days when currency was linked to the gold standard, or vaguely think that it is still the case that that little piece of paper with the pound, euro or dollar sign represents something tangible and of value stored in a vault somewhere. Or a pound coin is actually made from one pound’s worth of metal – although ironically for many countries the cost of minting smaller denominations is starting to cost more than the face value of the coin.
In fact, the fiat money system, used around the world today, is a legal fiction that has no actual value apart from that given to it by governments. The word “fiat” is Latin for “let it be done” and that is exactly what happens: governments and central banking authorities assign value to an essentially valueless item.
And it’s not a bad system, as discussed above. It all works because a network of ledgers controlled by banks around the world keeps track of transactions. And it works because we trust that it works.
We happily exchange money for goods and services from people we don’t know, over a counter or through an internet connection. Not so long ago, we would even read out our credit card details over the phone to another person! Many of us don’t even need that little piece of paper or pocketful of coins any more, we trust the number presented on our online banking app. And even for people who prefer cash – a report last year said that the cash in circulation around the world continues to increase, despite electronic options, and that, in Europe, a staggering eight out of ten transactions at tills are still cash – the fundamental fiat system still applies.
But now let’s think about emergence of cryptocurrencies and the underlying blockchain, and the ensuing moral panic. In a nutshell, cryptography, which is used to create the advanced algorithms that keep your passwords and chip and pin bank cards secure, steps in as the guarantor for the currency, replacing the role of governments and central banking authorities. And, instead of bank-controlled ledgers, a decentralised, anonymous digital blockchain keeps track of transactions.
So, instead of having to trust a central authority to validate and record transactions, and to negotiate transactions that take place across borders, any group of people can do this anywhere in the world. And the benefit of this is that, unlike a monopolistic central authority, transactions can take place faster, and more cost-effectively. For instance, one fintech startup has seen its transaction costs for international salary payments drop from $80 to less than a dollar, and the transfer takes place instantly.
The ability to streamline payments around the world seems like a good idea. Being able to reduce the cost for people to send remittances home to support their families is certainly a good thing. The ability for my global business to transfer money around the world instantly, without it being held onto by banks unnecessarily – allowing them to triple dip: they get paid once by me, and then win again on the exchange rate, and a third time by holding onto my business’s money for days or weeks – also seems like a good idea.
Of course, it’s early days and appropriate regulation needs to balance innovation with protecting people and preventing crime. But it strikes me that fraud and tax evasion revealed by the Panama Papers and Paradise Papers were carried out through the traditional banking system. And credit card fraud is still a reality. So, it seems then that the moral panic, the comparisons with Ponzi schemes, tulip mania, the South Sea Bubble and the dotcom bubble don’t ring true. Instead, perhaps it’s a case of the Shirky Principle, named for writer Clay Shirky, who said: “Institutions will try to preserve the problem to which they are the solution.”
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Kevin is the founder and CEO of idu Software. He has degrees in Commerce and Accounting, and started idu with partners James Smith and Wayne Claassen in 1998. Kevin is fast becoming a thought leader in his field, and makes regular comment in the media about current affairs affecting business...