Comment on Next Chapter of Money

Original article is here: The Next Chapter of Monetary History

Money in its earliest days have been more or less proved to be keeping track of credit/debt. The manifestation of such money could be stones, beads, shells or other things that were scarce in nature. Or it could be, as it happened on the Island of Yap, stone discs as a way of keeping a public ledger, where everyone knows who owns what. An introduction to the history of money can be found here:

Felix Martin, the author of ”Money, the unauthorized biography,” also brings up the Island of Yap. Here, the intent is to argue against that money must be backed by ”intrinsic value.” Money in its earliest form was never backed by anything.

The bitcoin blockchain for example has some similarities with the stones of Yap in that it’s a transparent public ledger. For example, Jon Matonis did bring that up in his talks. But what differs with bitcoin is that its supply is mathematically regulated and that derivatives of bitcoin can be made to be fully backed, which I would argue is the really revolutionary aspect of it.

What the Island of Yap illustrates rather is that it is very hard to define money. I would classify that it is one kind of money out of many. Money can represent debt between individuals or between individuals and the state. But money can also represent commodity instead of debt. And bitcoin (which I also classify as money) doesn’t fit any of these categories.

There’s usually a list of key attributes that ”defines” money. For example,

  1. Scarcity. Otherwise some could just ”find” money without effort.
  2. Durability. Once acquired, money should sustain their value.
  3. Divisibility. Make it possible to chop Into smaller units.
  4. Verifiability. To check that it’s not spoofed.
  5. Portability. That you can carry it with you.
  6. Fungibility. There’s no distinction between two units; they are both equal.

However, none of these capture modern money which is based on debt, maturity and risk. And is modern money scarce? It feels anything but. The other interesting aspect is the distinction between private money and public (sovereign) money that no longer exists due to the introduction of central banks.

Today money is intimately connected to the nation state, the sovereign. But I think this is going to break down as Internet makes it easier to do commerce across nation borders. There are no tolls on the Internet, and money will float freely between nation states through bitcoin or other digital currencies not controlled by nation states.

Money needs to be reinvented to suit these new purposes better.