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Money is the primary mechanism for storing and exchanging value, especially in our daily purchases, and it’s heading rapidly into a faster, smarter and more mobile future. Nevertheless, the constant in the midst of change will remain levels of human trust in the proliferating forms of money. That’s because we have an ancient and abiding partnership with money and no relationship is ever sustainable without trust.

It’s a time of accelerated innovation in this field due to the rapid global expansion of digital banking, especially online and mobile financial services. However, while payments and transfer of money shift inexorably towards mobile devices as the consumer technology of choice, digital currencies expand in scope and number and online shopping begins to enter a golden age, cash is still the most successful and popular form of money ever. Its trust level, as public money backed up by a promise to pay from the government which minted and manufactured it, remains extremely high. This is evidenced by the way the Greeks turned to cash during their fiscal and monetary crisis which rocked the whole European Union, as well as by cash’s current 8.9% per annum average global growth rate. Cash is undoubtedly one of the most successful social technologies in history.

In short, the future of money will be mobile, faster in execution and settlement, and yet as heavily dependent on trust as ever. In my view, for that very reason, there’s unlikely to be a cashless world in this century. Nor is such a scenario desirable, unless you’re a fan of a Big Brother society largely dominated and dictated by multinationals more powerful than many national governments. A cashless world would subvert the economic freedom of citizens to choose the form of money and payment they want and, if that weren’t bad enough, it would lead inevitably to even further marginalisation of the world’s poor. Besides, cash is already universally trusted, instant in execution and mobile in nature (that is, just as portable as a smart phone).

That said, digital banking is here to stay and provides massive levels of convenience and efficiency. Financial institutions the world over are fiercely focused on developing omnichannel (“every channel”) strategies to provide seamless customer experiences across all their banking channels.

In addition, a great “money race” is now on to dominate the world’s vast payment markets between the global card brands, the banks, the technology providers (such as Apple and Samsung), the Internet giants (e.g. Google. Amazon, PayPal), the social media giants (including Facebook, WeChat and Twitter) and, of course, the major retailers.

Having sketched a broad context for understanding what’s happening in the world of money and payments, here are ten megatrends to consider. This will be followed by six additional movers and shakers to watch in the coming months and years.

Megatrend #1: The smart world is coming

The smart world of smart consumers, some wearing smart technologies like the Apple Watch, smart devices and smart homes, is on its way. This will take place within the Internet of Things (IoT ). Gartner forecasts that the 3.9 billion smart devices connected to Internet at the end of 2014 will increase to about 25 billion by 2020. A key device in the smart world is likely to be the phablet. It should become the dominant mobile device. The number of phablets is expected to increase from 27 million in 2012 to around 230 million by the end of 2015. Business Insider, for example, predicts phablets will outsell smartphones by 2017. Money will gain multiple new forms as it adapts to this new smart world. Old and new forms of money will co-exist, resulting in much greater choice and convenience for consumers.

Megatrend #2: e-commerce is rising, along with digital shopping

Fortune Magazine recently rated the Bank of Internet, an online bank, as the 56th fastest growing company in the world. Online buying is growing exponentially across the globe. For example, WWW Metrics (http://www.wwwmetrics.com) expects Australians to spend $10 billion more online in the next five years than they do currently. The ease and convenience of online shopping cannot be disputed. Although it will never completely replace high-street shopping or lead to the rise of ghostly and abandoned shopping malls, it will probably enjoy good year-on-year growth for a long period to come. This megatrend will increase the importance of digital money.

Megatrend #3: There is a shift to mobile internet and mobile commerce

Today, mobile devices outsell PCs and laptops in a game-changing shift to mobile-based internet. It is therefore not surprising that mobile shopping is growing at 4 x the rate of online shopping. For example, Finextra has reported that 37% of e-commerce originates from a tablet or smart phone. Global mobile purchases are expected to rise from $150bn in 2014 to $214bn in 2015. Mobile money is going to be a big part of the future.

Megatrend #4: Debit card use is on the rise

The rise of mobile commerce does not mean the demise of cards. Retail Banking Research (RBR) have reported that there are now 12 billion payments cards in the world, which were used last year to make 235 billion payments, totalling $20 trillion. The debit card is the king of these cards, representing 68% of the global card market. This share is expected to rise to 72% by 2020. By contrast, credit card share is predicted to decline from 23% to 20% by 2020. Prepaid cards, at the bottom of the scale, have a mere 5% of the market. It is clear that card payments will dwarf mobile payments for the foreseeable future. It will be a long time indeed before mobile payments get close to card payments and cash payments. Nevertheless, the future is very bright for mobile money.

Megatrend #5: In-store NFC payments are being outstripped by mobile commerce in the mobile payments space

Near Field Communication (NFC) based payments – often called “tap and go” or “wave and pay” — have a slow adoption rate but should pick up a head of steam within the next five to ten years. They’re unlikely to grow at the brisk rate at which mobile commerce is growing. Deloitte estimates that only 7% of smartphone users use mPay at POS (Point-of-Sale). By 2018, in-store NFC payments are forecast to reach only about 4.5% of card volume. For the near future, NFC won’t be used much by customers in retail stores with high Average Order Values, but more at coffee shops and fast food chains with lower Average Order Values. Nevertheless, by 2020 there could be 2.2 billion NFC enabled phones and there is a good chance NFC may become a dominant technology as a result of global EMV compliance, with Visa and MasterCard building NFC into the migration path.

Megatrend #6: The omnichannel, customer-centric world has arrived

What Steve Jobs did so well was to introduce the “zen” feel of consumer technology after decades of boring, inert computer hardware and software. Now, there’s no turning back. All channels must be intuitive, all channels must complement one another, there simply must be a seamless omnichannel experience. This is the key to retention of the digital customer. This means money will become more zen-like, especially in an era when Customer Owned Devices (CoDs) have given the connected consumer more power, compared to more static self-service banking through traditional ATMs. Self-service terminals gave the customer access to banking services after hours 24 x 7 but they are banked-owned devices. Now consumers do their banking on their own technology. They demand a personal, smooth, convenient level of service purged of any old-fashioned “clunky” technology experiences. Money cannot afford to look and feel old-fashioned. Thanks, Steve. (By the way, polymer banknotes used in Canada, Australia and being introduced into Britain from next year, may well be the new look of cash, given the increased longevity and security they provide for notes.)

Megatrend #7: The bank branch is being reconfigured

In this increasingly digital world, in which non-banks can provide money and financial services, banks need to resist disintermediation from these new players by redefining the relationship to their customers. I’ve already indicated that the smart banking experience is going to be paramount. Accordingly, banks are redesigning their branches, to provide a balance of digital and traditional services, employing customer-facing technology. Assisted self-service, including remote video banking and in-person assistance, is proving very popular in this new world. At the same time, respect is being shown for the role of Customer Owned Devices and the kind of experience they offer to customers. Banks are saving costs and improving efficiency through increased automation, especially deposit automation. Self-service automation now accounts for 2/3rds of branch transformation technology, according to RBR. The costs of cash are being pushed down through cash deposit acceptance and through recycling ATMs, which are enjoying phenomenal growth in China, for example. RBR states that automated deposit and recycling ATMs make up 40% of global shipments in our industry. The bank branch of the future must be highly automated, smart, offering both in-person teller assistance and video banking.

Megatrend #8: The ATM is evolving into an indispensable value-adding 24×7 customer touchpoint

As CEO of the ATM Industry Association since 2005, I can attest that there is no global movement away from the ATM. ATM shipments have been growing y-o-y since 2010 following the global economic crisis of 2008–9. In fact, the ATM is central to both branch transformation and the omnichannel approaches. It is a highly trusted customer touchpoint found in great locations. I foresee deployers focusing more and more on valued-added services at the ATM, from ticketing to bill payments, while deposit automation and recycling ATMs will continue to reduce the costs of cash on a global scale (cash handling can account for 30–40% of the total cost of operating a large ATM estate). Besides, ATMs are main distribution channel for cash (for example, in the UK 72% of cash is acquired through cash machines) and cash demand is growing (see Megatrend #9 below).

Megatrend #9: Global cash demand is rising at 3 x the rate of economic growth

In an ATM Industry Association study of growth in currency in circulation in thirty countries, representative of advanced and developing economies, over a five year period from 2009–2013, it was found that global cash demand is growing at an average of 8.9% p.a. This is 3 x the rate of global GDP during this time. The study was based on central bank statistics in these thirty countries in annual reports. This figure accords with a prediction by the leading retail banking research house, RBR, that annual cash withdrawal volumes will grow by 7.9% between 2013–2019. In the BRICS countries, which contribute 20% of world GDP with 40% of its population, currency grew y-o-y in this period at 11%, compared to 4.5% in the Eurosystem. If you want to get a feel for cash production in the world’s number one economy, check this out: in the USA, 6.2 billion banknotes were printed in 2014, about 24.8 million per day!

As mentioned earlier, recent turmoil in Greece pushed up demand for cash. For example, in May, 2015, €45 billion in banknotes was in circulation, which equates to just over €4,000 per citizen.

For years now, I have noticed a widening gap between fact and perception regarding cash. Despite being under threat from some governments and other agencies seeking to create a cashless society, as well as a largely hostile media, cash is holding its own as a dominant payment method in the brave new world of digital banking and shopping

Megatrend #10: Remittances and financial inclusion are growing in importance

Today, there are still 2 billion unbanked people. 38% of adults do not have access to basic financial services. That is why financial inclusion is going to be so important a tool for addressing the growing wealth gap between haves and have-nots, which is neither sustainable nor just. However, there is hope: mobile money! While 28% of US households are either unbanked or underbanked, mobile penetration is at 90% of households. Just look at how mobile phones transformed the landscape in Kenya. The renowned MPesa mobile money transfer and payment system gained 17 million users in just 8 years. Mobile phone owners who had never had a bank account in their lives could suddenly conduct secure, fast and convenient financial transactions.

Tellingly, cash in circulation continued to grow strongly during these years of exponential MPesa growth. Today cash transfers and use of vouchers are set to revolutionise global humanitarian aid as more effective than goods. In a time of migration crises, rising natural disasters and extreme weather events, giving cash and vouchers to people in need, trying to survive in an emergency, is the civilised way to go. Physical aid, hamstrung by tough logistics, seldom empowers those most in need in a timely fashion.

What’s also important to the world’s poor is the ability to send remittances. In 2014, there were $440 billion in recorded remittances. Now big names like PayPal are entering this growing remittance market. Money can mean survival. The world would be a much better place if we could take remittances and money transfers to a new level. That’s money in action.

Now think about the following innovations likely to further change the world of money in the near future.

Movers and Shakers #1: Samsung Pay is likely to become the leader in mobile payments within months of its launch

Samsung Pay is going to blow Apple Pay (sorry, Steve) out of the water and here’s why. It combines NFC and MST (Magnetic Secure Transmission) communication, so it can be used at 30 million merchant locations worldwide. Apple Pay is stuck in the slow-moving NFC space. In addition, Samsung is partnering with a network of big players, including global banks, card brands, PayPal, etc. Samsung Galaxy S6 is seen by many technology gurus as the world’s leading smartphone. Finally, the new payment app will be linked to smart TV through a partnership with PayPal to enable payments on the TV platform, using a secure virtual keypad, in thirty-two countries.

Sadly, Apple Pay has a high drop-out rate with 48% of 1st time users not using it again (source: Tremont Capital). While I see the Apple Watch making a major statement and becoming a status symbol among young smart consumers, Apple Pay is probably doomed to play second fiddle to Samsung Pay.

Movers and Shakers #2: PayPal is moving into retail stores and remittances

PayPal, which has 130m online accounts, has agreed to buy online money-transfer company Xoom Corp.for $890m. Xoom’s online service lets users send money internationally, often via mobile phone, charging $5-$10, as well as pocketing the difference in the exchange rates; the service may also be used to pay bills. At the same time, PayPal is also partnering with Discover Financial Services to enable PayPal payments at retail stores. Is PayPal going to become the world’s biggest “bank” of the digital age?

Movers and Shakers #3: Zapp is likely to become a successful domestic mobile payment solution in the UK

Zapp in the UK, introduced by VocaLink, which is part of LINK, the powerful national ATM network, is one to watch. The system will use NFC, which is widely deployed in the country, but will works on the ACH system, which means it will exclude interchange while enjoying fast settlement. It is available to 18 million UK account holders and is strongly supported by all the major banks and retailers. Sounds like a winning formula to me. Money, after all, has a strong national identity and dimension. It isn’t as intangible as it may seem, even in the electronic age.

Movers and Shakers #4: Digital currencies and blockchain technology are here to stay

There are now over 500 decentralised digital currencies in existence. Some central banks are even considering issuing a national digital currency as a back-up currency. There is also talk of future digital currencies which could be asset-based, such as linked to gold or property assets. In Greece after its monetary crisis, it was decided to install 1000 Bitcoin ATMs.

What is becoming clear to operators and to regulators is that the blockchain technology behind bitcoin, which is incredibly robust, has other potential applications, for example, programmable money and currency exchange. Expect to see digital currencies and blockchain technology revolutionise the nature and uses of money.

Movers and Shakers #5: Social media giants are expanding their role in the payments space

Facebook purchased What’s App, with its 500m subscribers for $22bn to add to its own users — 1.19 billion monthly active users, 874 million mobile users, and 728 million daily users. That’s a huge move and it has implications for the future of money. Users can now send or receive money in Facebook Messenger after adding a debit card to the Facebook account. Then you can open a chat with the friend you want to send money to, enter the amount you want to send, click next to your debit card and then click Pay.

Meanwhile, WeChat, with 600m active users, has a mobile payments app for customers to buy in-app items or services. It works for both in-store payments (where retailers will likely scan a QR code generated by your order inside WeChat) or for purely online purchases that’ll be delivered later.

Social media will completely change the face (excuse the pun) of money. They will make it more personal and intimate.

Movers and Shakers #6: Current C is a model of a mobile payment app from a retail consortium

Finally, don’t write off the major retailers. They, too, want a piece of the payments action. Merchant Customer Exchange (MCX) is a company created by a consortium of U.S. retail companies, including Walmart and 7-Eleven, with $1 trillion in annual sales. The consortium has developed a merchant-owned mobile payment system which works through a digital wallet and a smartphone app. To make a purchase, the user scans a QR code shown on the cashier’s screen, or has the cashier scan a QR code from the phone’s screen. The payment settles on the ACH system for speed and efficiency.

These 10 megatrends and 6 movers and shakers together sketch the picture of a battle of the titans for control of the ever-expanding global payments market as it gets transformed by the new digital options opening up for billions of increasingly connected consumers. When the dust settles, only the strongest, most trusted forms of money will still be standing.

Michael Lee’s second book on the future, Codebreaking our Future – deciphering the future’s hidden order, was published in 2014 (http://www.amazon.com/Codebreaking-our-future-Deciphering-futures/dp/1908984260). He is also author of a trilogy of science faction novels available on Amazon, Voyage of the Moon Dream, Heartbeat and Rocket Ride of the Secret Cosmonaut (http://www.amazon.com/Science-Faction-Trilogy-Cosmonaut-Heartbeat-ebook/dp/B00T31U4U8/ref=sr_1_2?ie=UTF8&qid=1443180236&sr=8-2&keywords=voyage+of+the+moon+dream)

This short post is not about Bitcoin. It’s about a new method of organizing and arbitrating communications that is at the heart of Bitcoin

We hear a lot about the blockchain. We also hear a lot of misconceptions about its purpose and benefits. Some have said that it represents a threat to banks or to governments. Nonsense! It is time to form a simple, non-political, and non-economic explanation…

What is a Blockchain?

The blockchain is a distributed approach to bookkeeping. It offers an empowering, efficient and trusted way for disparate parties to reach consensus. It is “empowering”, because conclusions built on a blockchain can be constructed in a way that is inherently fair, transparent, and resistant to manipulation.

This is why blockchain-backed systems are generating excitement. Implemented as distributed and permissionless, they take uncertainty out of accounting, voting, legislation or research, and replace it with trust and security. Benefits are bestowed without the need for central authority or arbitration. The blockchain not only solves a fundamental transaction challenge, it addresses communication and arbitration problems that have bedeviled thinkers since the ancient Egyptians.

Related:

—Philip Raymond, CRYPSA Co-chair
Cryptocurrency Standards Association

When my daughter was just starting primary school, she would look inside a book for the pictures before reading the text. She was old enough to read without pictures, but she wanted to get a quick synopsis before diving in. “Look, Dad! a bunny is carrying a giant clock into a rabbit hole.”

White Rabbt-01This is my first article without pictures. At least none of Bitcoin, because the copper coin metaphors are tired and inaccurate. At the user level, owning bitcoin is simply your stake in a widely distributed ledger. Ownership exists only as strings of secret code and public code. There is no physical coin.

Since the only pictures in this post show a white rabbit with a big clock, let me give you the quick synopsis: The answer is “No”. Bitcoin will not end government, nor its ability to tax, spend—or even enforce compliance.

But there is an irony: Most lawmakers and regulators have not yet figured this out. They perceive a great threat to their national interests. That’s why Andreas M. Antonopoulos runs around the world. He briefs prime ministers, cabinets and legislators with the noble purpose of demystifying and de-boogieing Bitcoin.

Does Bitcoin Help Tax Cheats?

I accept the need for taxpayer reporting, measurement, and compliance initiatives. After all, it’s human nature to dislike paying taxes. Many individuals dodge taxes, if the perceived risk of being caught is low. Sociologists also point out that people are willing to cheat a system, if they perceive it to be sufficiently big or impersonal—i.e that their individual contribution is meaningless.

[ASIDE]: For this reason, Akamai Technologies ends their free-soda-&-snack policy whenever an office grows beyond 30 people (I learned this during a job interview a few years ago). People who would normally respect the policy begin pocketing free sodas for their home or friends, if (a) they no longer know everyone, or (b) they perceive the extra burden is just a drop in the corporate bucket, and not a burden on their office peers.

I suspect that most early proponents of Bitcoin are partially motivated by a desire for low taxes and privacy. While I don’t feel that these individuals are bad for the cause (after all, I am one), I feel that it is unfortunate that they appear to be the overwhelming majority of users & supporters. Let’s dismiss, for the moment, the fraction of voices that want to completely end government and taxation…If you believe in any taxes at all, then government needs compliancy mechanisms, including methods that measure, verify and ultimately arbitrate or prosecute offenders. (Don’t blame me…I’m not even the messenger here. Just an observer).

My point is that in their effort to control a country’s monetary supply (and the interbank loan rate, etc) and in their effort to ensure taxpayer compliance, a great many governments view Bitcoin as a threat. In the past, I felt that my job was to evangelize the public on the benefits of cryptocurrency, and to a great extent, that’s what CRYPSA is all about. But in recent months, I have become confident that Bitcoin will become ubiquitous. It doesn’t need me to be an evangelist. The freight train is now rolling downhill. But…

Andreas Antonopoulos-01s
But as an engineer, author, speaker and occasional consultant, I have found a new calling. Like Andreas Antonopoulos (my idol), I have found a calling in de-boogieing Bitcoin to lawmakers and regulators. I demonstrate that (a) cryptocurrency represents far more of an opportunity than a threat to a national interests, and (b) the future is coming at ya’.
So, either: Stand pat; Get out of the way; or Hop on!

I can give an audience filled with old-school conservatives compelling reasons to “hop on”. Ultimately, blockchain technology coupled with true, permissionless, p2p transactions will shake up established mechanisms and enforcement protocols. They will force new ways of thinking. But cryptocurrency will not end the reign of government—nor even end the ability to tax, enforce and spend. It will simply change the way they do these things. It will also change the way we conduct polls, vote, arbitrate disputes, perform scientific research and much more.

Bitcoin and the blockchain are not just technologies. They transform the way in which many tasks are performed. But it’s not just about efficiency. These technologies offer mechanisms to level the playing field. TWhite Rabbt-02hey bring fairness and representation to processes that were opaque and perhaps even relied on the excuse of opaqueness.

Ultimately, Bitcoin may render certain government departments redundant. Nations will begin to question their need to directly control monetary policy. The impact at the department level is no reason to fear Bitcoin. Overall, it represents great opportunity and not a threat. In my opinion, the changes will benefit everyone.

Bitcoin is not an us-against-them instrument. It is win-win. Of course, perception counts. Misunderstanding potential and confusing it for a threat is a fundamental problem. I share CRYPSA’s passion to help make it a very short-term problem.

Philip Raymond is CEO and Co-Chair of CRYPSA,
The Cryptocurrency Standards Association.

For most of us, figuring out the value of something that we want, comes from research. If you want a new set of wine glasses, you check the price online. Perhaps you consult a catalog. If the set of 8 stemware goblets that you like are a current model from a major company, there are probably many places to buy them. If there are multiple Ebay sellers and many recently completed sales, then you can establish the value with precision.

I’ve written a lot of Bitcoin articles on this Lifeboat Blog and elsewhere, so, let’s dig a bit deeper this time. Let’s talk about from where value really comes.

Supply and Demand

In the end, an item’s value is a direct result of supply and demand. It’s no different with a currency. And let’s be clear: Despite a raging debate, Bitcoin is a currency and not just a payment instrument. How can I be certain? Try this mental exercise—

Amazon_Gift_CardWestern Union money orders and Amazon Gift cards are each trusted monetary instruments. They facilitate cash transactions. But are they currencies with inherent value? If so, there would be no need to denominate them in units of fiat currency.

A money order is only worth something before it is redeemed. The gift card is only worth $500 when it is purchased or received as a gift. As the $500 is depleted, it becomes worthless. Eventually, it is just a piece of plastic. But like a dollar bill, a bitcoin can be circulated over and over. You may believe that its value comes from the government, but more realistically, its value arises from brand recognition and from pure supply and demand—not from a trusted redemption authority.

Bitcoin isn’t the first ethereal stash of bits with value. But it is more durable than others. The latest Pixar film on DVD or On Demand from your cable service provider has value. But piracy reduces the value dramatically. The supply is no longer scarce (no matter the demand) because of the ease and willingness to replicate digital files in any quantity. A Picasso painting is very rare, but it is so scarce, that we cannot gather enough data points to establish a stable value. Even worse, it’s not portable, divisible or fungible and it is nearly impossible to validate in the hands of the average person.

But, commodities like iPhones, Doritos tortilla chips—or even non-branded things, like Idaho potatoes, have a large and fluid market. These things have very measurable value and we can track the change in value over time.

People like to think that money is different than other commodities. In practice, it differs only by its handling characteristics: Compared to a Bitcoin-08Picaso painting or a new iPhone 6, currency has these properties. It is:

  • portable
  • fungible
  • divisible
  • widely recognized
  • resistant to forgery
  • backed by something tangible

Bitcoin has all of these characteristics. In fact, it surpasses your national currency in every way. But many people are confused about that last niggling detail… Aristotle called it “intrinsic value”. They worry that there is no gold—or at least the promise of a stable government—to establish and stand behind the value of a bitcoin unit (BTC). The concern is understandable, but it is wrong.

Recall that value arises through supply and demand and not simply because of authority or promises. The real question is “Can we trust that the supply is limited and that the demand is durable?”. That is, will my coin be recognized, coveted and honored in the future?

The Case Against Bitcoin as a Currency

Here are some frightening facts (frightening for some cryptocurrency enthusiasts and early adopters): Bitcoin is manufactured out of thin air. It lacks the underpinnings of a traditional currency. Referring to that last item on Arisotle’s list above, Bitcoin seems to fail the test of intrinsic value, because it lacks at least one of these properties:

  • A fractional reserve requirement
  • An edict to remit taxes in Bitcoin
  • A promise of a trusted authority
  • Any claim of pegging it to the value to some essential commodity (intrinsic value)
  • Bitcoin doesn’t even offer a perception of uniqueness. The formula is open for anyone to copy. You could create a competing ‘Bob-coin’ tomorrow.

In the absence of at least one of these things, detractors claim that Bitcoin lacks a foundation—and so it is effectively worthless. But value does not come only from authority. It comes from trust and is goverend by supply and demand.

snoop-03
The dollar is backed by trust — Not gold, math, nor even history

In fact, math may be a more trusted ‘authority’ than the directors of your national treasury and reserve board. Supply and demand leads to more tangible value than bankers, especially if the math leads you to believe that the demand will continue to outpace the supply. In fact, this is the primary reason that you are comfortable with a $20 bill in your pocket. You have a pretty good idea, that next week, it will still buy 2 movie tickets or 2 pizzas.

Bitcoin has achieved a “two-sided network effect” (Google the term and the economist “Marshall Van Alstyne”). It has captured the public imagination more than Picasso. It cannot be manufactured. With a reasonable understanding of wallets, it cannot be seized, stolen or lost.

The ability to mine new bitcoins is capped with a total supply of 21 million units, and so there is no opportunity for governments to inflate it through mismanagement of taxation or spending. They cannot even inflate it with good intent (for example, when they need to repair a bridge or provide for the poor). Instead, the ability to pay for these services (and all other government functions) forces them to live within a balanced budget. Spending cannot outpace the revenue generated by taxes and bonds. In a Bitcoin economy, the bonds will more likely be paid back by user fees rather than the future debt of unborn generations.* You get the point: Because governments no longer control the printing press, they cannot make hollow promises and then kick the problem into the next administration. With a limited money supply that everyone recognizes as money, governments are forced to live within their means.

What About Uniqueness?

The last item in the list above decries Bitcoin’s lack of uniqueness. You cannot mint your own bitcoins of course—but you can create an equivalent bitcoin ecosystem yourself. If your name is Bob, you can call it Bobcoin. Many countries and organizations are already doing this.

This is really no different than the US Dollar or your own national currency. The government note is difficult to counterfeit, but so is your own signature when placed on a fancy printed currency (Let’s call it a Bob-Buck). The problem is that the dollar is widely recognized, trusted and accepted, but few people other than your kids are collecting Bob Bucks.

You would face the challenge of spurring adoption. Whether it’s Bob Bucks (paper) or Bobcoin (cryptocurrency), how will you get the world to covet, mine and trade your new currency? That’s the point of a two-sided network. It becomes increasingly more difficult after one method rises to the top—especially if that method is open, transparent and extensible. Bitcoin is open. It is subject to worldwide scrutiny. But this works both ways. Bitcoin can also add incremental improvements that are part of any pretender to the throne.

Bitcoin is not just a transient coin-du-jour. It evolves and so it will not die.

How Can the Value be Measured?

I get this question a lot, and so I am adding the answer here. There is no need to measure the value of Bitcoin or define debt. Its value floats with supply and demand like a true world currency. Because the supply growth is capped and well understood, it is resistant to manipulation. As time goes by, it becomes far less likely to exhibit wild swings in value.

A few years from now, if Bitcoin spikes or tanks by 10% in a short time, you will be more likely to wonder “What is affecting the dollar?” (or Euro), rather than “What is affecting Bitcoin”. Consumers will budget for the cost of a new car or refrigerator in BTC rather than dollars or Euros. You will even see catalogs that print prices in BTC and honor them for the life of the catalog or online sale. After all, in an international market, it makes sense to quote a price in units with no geopolitical boundaries, just as we quote time in UTC (formerly called GMT).

Are these predictions crazy? They are not even bold. For us, here at Lifeboat Foundation, they are rather obvious. If we can be accused of dreaming, it is because we are ahead of the game. Look ahead, yourself. The signs are clear…

If Bitcoin has Value, What is the Value?

As Bitcoin adoption moves past enthusiasts and early adopters, the capped supply of coins (21 million, max) will be spread thinner and thinner. This doesn’t play out like a classic shortage, because unlike a supply squeeze on food or medicine, you can work with a smaller piece of the pie each year. The piece needed to pay for a car or an iPhone simply gets smaller as the unit price floats higher and higher.

Last year, I set up an equation to predict how high Bitcoin will float in 5 or 10 years. It involved a lot of WAGs (wild *ss guesses). Although I am a pundit, I am not a mathematician, and so the attempt was incomplete. No need to rehash that exercise.

Passport-s-TAs Hysteria Withers, Bold Becomes Mundane

Eventually consumers, banks, brokers, and governments will recognize that Bitcoin is a far greater opportunity than it is a threat. It pulls the world together by decoupling currency controls from national agenda, inflation, manipulation and loss (You can back up your Bitcoin. Try doing that with your paper money or a defunct bank).

Philip Raymond is CEO and Co-Chair of CRYPSA,
The Cryptocurrency Standards Association.

_____________
* This is just one reason why an eventual transition to Bitcoin (as currency, and not just as a payment instrument) is in the national interest. It demonstrates to citizens that monetary policy is backed by more than growing debt, inflation or the promises of transient officials. It returns any government or economic entity to a non-inflationary, limited-supply pie. The pieces of pie can grow in value, but the pie cannot be watered down by printing more ingredients, counterfeit or even by enemy action.

Further Reading

https://soundcloud.com/a16z/a16z-podcast-techs-big-ideas-and-the-swallow-the-red-pill-moment-with-dan-siroker-and-marc-andreessen

Is Bitcoin money? To its users the answer is probably yes, but to many people the answer is less clear. Alan Greenspan, for example, said in December 2013: “I do not understand where the backing of Bitcoin is coming from. There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual.” Indeed, one of the things holding back the adoption of cybercurrencies such as Bitcoin is that they do not fit well with traditional ideas about money.

Answers to the question “what is money” have typically fallen into one of three camps. The first, known as metallism or bullionism, holds that money needs to be backed by precious metal. The second camp is chartalism (from the Latin charta for a record) which holds that coins and other money objects are just tokens, that the state agrees to accept as payment of things like taxes. Finally, there is the dominant, hands-off school of thought, which most mainstream economists would agree with, which says that money has no unique or special qualities, but instead is defined by its roles, e.g. a medium of exchange.

Bullionists and chartalists therefore emphasise a different aspect of money – the inherent value or the authorising stamp – while most economists treat it as an inert chip. But none of them seem to apply well to emerging cybercurrencies, which are not backed by precious metal or the state, and (at least at first) are not much use as a medium of exchange. So how do they become money? The answer to this question is that money has quantum properties which allow it to be booted up from the ether.

Quantum money

To see why money has quantum properties, consider for example a U.S. dollar bill. On the one hand, it is a physical object which can be owned, traded, and valued. On the other hand, it represents “1”, which is why it is emblazoned (in fifteen places) with that number. And numbers and things are as different as waves and particles. Numbers live in the abstract, virtual world of mathematics, while things live in the real world – and it is the tension between its two sides which give money its powerful but often paradoxical nature. Numbers are exact, while qualities such as perceived value depend on the person and the context. Numbers can grow without limits, while natural processes tend to be bounded. Numbers are universal, while objects can be owned, or become scarce. Numbers are hard and fixed, like the particle aspect of matter. Concepts or judgments such as worth or value are fuzzy, like the wave aspect of matter.

The trade of money objects for goods or labor in a market means that those things attain a numerical value as well, namely the price, by contagion, just as the atoms in iron spontaneously align in a magnetic field. Market prices are therefore an emergent property of the system, in the sense that they emerge from the use of money objects.

Money objects are unique in that their value is designed to be objectively fixed and stable. For other goods, their values are indeterminate until the moment they are exchanged for money (just as, according to quantum mechanics, the position or momentum of a particle is fundamentally undetermined until it is measured, at which point it “chooses” a value). This special status makes money objects desirable in themselves. It is often said that money is just a medium of exchange so need have no value itself; but by attaching numbers to money objects, in a kind of alchemy, we make them valuable.

The word “quantum” has been applied to all kinds of thing outside physics and is often misused to evoke a vague sense of spooky, non-mechanistic behavior. However the use of the term, and more generally the comparison with non-Newtonian physics, is constructive here for the following reasons:

  1. Money is seen as a fundamental quantity (from the Latin quantum).
  2. Money objects contain a fixed amount of monetary value, in the same way that an electron contains a fixed amount of charge.
  3. Money objects bind the virtual to the real, and abstract number to the fuzzy idea of value, in a way similar to the particle/wave duality in quantum physics.
  4. Just as the properties of a substance such as water emerge from the quantum interactions of molecules, so prices emerge from the use of money objects.
  5. Money serves as a means to quantify value, in the sense of reducing it to a mathematical quantity – but as in quantum measurement, the process is approximate.

(Finally, economics is often accused of physics envy – so why not go all the way!) By attaching numbers to our idea of value, in order to quantify it, the money system binds together two very different things, and it this fusion which gives rise to its complex behavior.

Emerging markets

Implicit to traditional theories is the idea that money has to be backed by some pre-existing quantity, be it real (e.g. metal) or virtual (e.g. the law of the state). It therefore inherits its value from outside. But from a quantum perspective, rather than money being backed by something of monetary value, it is the other way round – market value comes from the use of money. This has implications for the way we interpret phenomena such as cybercurrencies, and in particular helps to explain their ability to boot themselves up from nothing more than a set of rules and an internet connection.

As mentioned above, money objects are desirable in themselves – so the more something looks like money, the more valuable its numbers become, in a self-reinforcing dynamic. And just as market prices emerge from the use of money objects, so the money system expands with its markets. A cybercurrency is supported not by metal or the state, but by something much more distributed and amorphous – its network of users. A property of networks is that their power expands rapidly with size. The value of a cybercurrency therefore grows in the same way with the size of the network of users, so can initially be near-zero. It is therefore not necessary to begin with an external debt or a source of value, because the two can expand together. Numbers which were just numbers, can suddenly become worth a great deal.

When Satoshi Nakomoto mined the first bitcoins in January 2009, he (if it is a he) had to give them away to get people interested. They had numbers, but no value. In October of that year, users set up a web site quoting a price which corresponded to the cost of electricity required to mint a coin (about 0.0008 dollars per bitcoin). Once a price was available, people began to trade, but it remained a game – until May 2010 when a software engineer managed to buy two pizzas for 10,000 BTC, by posting a request on the Bitcoin forum. Someone accepted the bitcoins and ordered the pizzas using a credit card. Bitcoin was becoming money, and it never looked back.

One reason cybercurrencies have met with resistance, from economists such as Alan Greenspan but also the general public, is because they do not conform to our traditional ideas about money and value. When the first bitcoins were mined, they had neither inherent value, nor the power of an authority. Instead the two aspects – the real and the virtual – grew together, reinforcing each other as the number of users expanded. The problem is therefore not with cybercurrencies, but with theories of money which were shaped by previous monetary eras of gold standard or state fiat currencies.

Adapted from the full paper available at SSRN.

Responding to this nugget from Engadget:

Tokyo District CourtTokyo’s district court has ruled that it’s not possible for people to own bitcoin, and therefore they cannot sue for compensation in the wake of Mt. Gox’s collapse.

The ruling comes days after the head of the world’s largest bitcoin exchange was arrested on charges of fraud. Judge Masumi Kurachi felt that bitcoins do not possess “tangible qualities” to constitute owned property. Mt. Gox held thousands of individual accounts, and so there’s plenty of angry customers looking for compensation.

Here at Lifeboat, we have a long term view of cryptocurrency, and we sense the underpinning of fundamentals that are often overlooked.

My response to the Tokyo court…

A personal stake in Bitcoin is every bit as real (and a bit more tangible) than a personal stake in Yen, Dollars or Euros. Fiat currency is backed by the knowledge that your national government will demand tax payments in kind. But is it tangible? Like any invention of humans, that’s a matter of perception.

a) Dollars / Yen / Euros

Dollar_closeOver the long term, national currency is likely to be debased by debt, social welfare, war, political ambition, and a desire to redistribute fruits of labor, typically to assuage political ambitions. A built in mechanism of inflation forces a hidden tax and enables legislators to spend beyond the consent of their constituents.

b) Bitcoin

Bitcoin_BlueBitcoin on the other hand is backed by math. It is an asset without the potential for inflation or manipulation. It is a pure supply-demand currency and a pure 2-sided network—completely unfettered by the chaff that comes with central banks and national treasuries.

A stake in Bitcoin rises over the long haul, because the total quantity of currency is capped. As it is adopted for payments and commerce, a fixed pie is sliced thinner and thinner. This results in increased value per unit. Result: A deflationary economy without the baggage of sluggish economics.

Japan has made a foolish pronouncement; one that will ultimately embarrass their courts. Declaring Bitcoin ethereal is laughable when you consider that paper money is no more tangible than an unfulfilled promise. Likewise, declaring the theft or mismanagement of Bitcoin unworthy of recovery or restitution is no different than declaring the theft of art unworthy of restitution. Consider that each Mt. Gox account holder has proof of a real dollar investment position and an appreciation that is reported and tracked by exchanges all over the world.

Wake up Japan. You have so much more to offer the world than a distorted interpretation of a new technology.

Philip Raymond is Co-Chair of CRYPSA,
Cryptocurrency Standards Association

July 9 update:
3 days after posting, Visa acknowledged that Bitcoin has a future in payments. This is an understatement, of course. The bank described below goes a step further by acknowledging that the entire financial infrastructure may cave to cryptocurrencies.

burning-cashFrench bank BNP Paribas warned customers and investors that the technology behind bitcoin might one day overtake conventional, account-based financial institutions, thus rendering existing companies redundant (that’s British for “obsolete”).* It’s a tectonic acknowledgement from one of the world’s biggest banks.

Analyst Johann Palychata writes in the company’s magazine Quintessence that Bitcoin’s blockchain, the underlying architecture that allows cryptocurrency to function, “should be considered as an invention like the steam or combustion engine,” that has the potential to transform the world of finance and beyond.

Check out the full story by Oscar Williams-Grut at Business Insider.

* Although Bitcoin will obsolete the current service mix of financial institutions, it is my opinion that for savvy governments and established businesses, it represents a long term opportunity rather than a threat. —PR

__________
Philip Raymond is Co-Chair of The Cryptocurrency Standards
Association [crypsa.org] and chief editor at AWildDuck.com

What is Bitcoin?

Bitcoin-05-t-sSure—You know the history. As it spread from the geeky crypto community, Bitcoin sparked investor frenzy. Its “value” was driven by the confidence of early adopters that they hitched a ride on an early train, rather than commercial adoption. But, just like those zealous investors, you realize that it may ultimately reduce the costs of online commerce, if and when if it becomes widely accepted.

But what is Bitcoin, really? To what class of instruments does it belong?

• Ardent detractors see a sham: A pyramid scheme with no durable value; a house of cards waiting to tumble. This is the position of J.D, an IRS auditor who consults to The Cryptocurrency Standards Association. As devil’s advocate, he keeps us grounded.

• This week, MasterCard was only slightly less dour. They claim that the distributed nature of Bitcoin will ultimately cause it to unravel. They want us to believe in the necessity of a trusted authority as broker/guarantor/arbiter. I get it! After all, the block chain is a serious threat to the legacy model for moving money

• Many people recognize that it can be a useful transaction medium—similar to a prepaid gift card, but with a few added kicks: Decentralized, low cost and private.

• Or is it an equity asset, traded by a community of speculative investors, and subject to bubble psychology? If so, do the wild swings in its exchange rate diminish its potential to be used as a payment mechanism?

• Full-fledged ehthusiasts say that Bitcoin has the potential to be a full-fledged currency with a “real value” that floats based on supply and demand. Can something that lacks intrinsic value or the backing of a bank or government replace national currency?

Regardless of your opinion about Bitcoin, it does one thing that few pundits dispute: Sure, the exchange value fluctuates—but for those who don’t plan to retain holdings as an asset, it reduces transaction costs to —nearly zero. This characteristic, alone, is a dramatic breakthrough.

Peering Into the Future?

Removing friction is certainly what it is all about. As a transaction medium, Bitcoin achieves this, but so does any debit instrument, or any account in which a buyer has retained house “credit”.

Bitcoin_pullback-sCurrently, there is a high bar to get money exchanged into and out of Bitcoin. It’s a mess: costly, time consuming and a big hassle. Seriously! Have you tried using an exchange? Even the most trusted one (Coinbase of San Francisco) makes it incredibly difficult to get money in and out of BTC, prior to establishing your account, identity and banking history. Fortunately, this situation is gradually improving.

Where Bitcoin really shines (or more accurately, when it will shine), occurs at the time when more vendors choose to leave revenues in BTC, pending their own purchases from suppliers, shareholder payouts, or simply as retained savings.

When this happens, all sorts of good things will follow…

• A growing fraction of sellers leave their bitcoin in their wallets, realizing that they will need to spend it for their own labor and materials.

• Gradually, wild exchange-rate gyrations diminish—not because fewer people are exchanging money, but because the Bitcoin supply/demand value is driven more by actual commerce than it is by speculation.

• Sellers begin pricing merchandise in Bitcoin rather than national currencies—because they are less anxious to exchange out of BTC immediately after each sale.

When sellers begin letting a fraction of bitcoin revenues ride—and as they begin pricing goods and services in BTC—a phenomenon will follow. I call it the tipping point…

• If goods and services are priced in BTC, then everyone involved saves money and engages in transactions more efficiently.

• If goods and services are priced in BTC, then the public will begin to perceive exchange rate volatility as a changing dollar rather than a changing bitcoin.*

• If buyers also begin to save their BTC (i.e. they do not worry about immediately moving it back to national currency), it means that Bitcoin is being perceived as a stored value—not just an exchange chit. That may seem to be a subtle footnote, but the ramifications are earth shaking. That earthquake is the world gradually moving away from centralized treasury-issued bank notes and toward a unified and currency that we can all trust.

People, everywhere, will one day place their trust in a far more robust and trustworthy mechanism than paper promissory notes printed by regional governments. A brilliantly crafted mechanism that is fully distributed, p2p, transaction verified (yet private), has a capped supply and is secure.

What Then?

O.K. So we believe that Bitcoin is the future of money and not just a replacement for credit cards. But what does this really mean? Can the series of cause-and-effect be extrapolated beyond widespread user adoption? Absolutely! …

Adoption of Bitcoin as a stored value (that means as a currency) leads to the gradual realization among governments that Bitcoin is not a threat to sovereignty nor even to tax policy. Instead it presents unbounded opportunity: The opportunity to stabilize markets, eliminate inflation, reduce costs and restore public trust. In short, Bitcoin will ultimately level the playing field, revive entire economies, transform the role of government, and save consumers and businesses billions of dollars each year.

Did I mention that Bitcoin is the future of commerce and a very possible successor to legacy currencies? Aristotle must be smiling.

* We tend to think of the dollar as more ‘real’ than Bitcoin. It is not! It has only one advantage. At the end of the day, taxpayers must settle their debts in the currency demanded of their nation. But as Bitcoin adoption gains traction—even if only as a transmitting medium—fiat currencies will gradually become marginalized as play money. That’s because they are susceptible to inflation, politics and manipulation. Bitcoin is held to a higher standard. It is governed by pure math. Despite high-profile news of the day, Bitcoin will even become more resistant to loss and theft than dollars, once tools and practices become well established.

Uncle Sam can lease the US Treasury building to pay off debt brought about by inflation
Uncle Sam can lease the US Treasury building to pay off debt brought about by inflation

Philip Raymond is Co-Chair of The Cryptocurrency Standards Association. He advises banks on new
age currency. Raymond was master of ceremonies and 1st speaker at The Bitcoin Event in New York.

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