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An Era of Digital Currencies
By David Birch, Director, Consult Hyperion
The noted “lateral thinker” Dr. Edward de Bono wrote a pamphlet called “The IBM Dollar” for the Centre for the Study of Financial Innovation (CSFI) back in the early 1990s, in which he rather memorably remarked that he looked forward to a time when “the successors to Bill Gates will have put the successors to Alan Greenspan out of business”. (It was reprinted in David Boyle’s superb book “The Money Changers” in 2002). Dr. de Bono was arguing that companies could raise money just as governments now do — by creating it from thin air. Now, if that notion seems to have resonance with cryptocurrencies, token and initial coin offerings (ICOs) then, well… yes, that’s my point. As The Economist said back in November, right now ICOs are a bubble but “they hold out the promise of something important.” I agree, and I think that “something important” is the private currencies of the future.
The idea of private currency as a claim on products or services produced makes economic sense. IBM, in de Bono’s example, might issue “IBM Dollars” that would be redeemable for IBM products and services but are also tradable for other companies’ monies or for other assets in a liquid market. This a new kind of market. A start-up launches, and instead of issuing equity, it issues money that is redeemable against future services. So, for example, a distributed file storage start-up might offer money in the form of megabyte days that are redeemable five years from now. In the early days, this money would trade at a significant discount to take account of the risks inherent in the venture. But once the file system is up and running and people like using it, then the value of the money will rise.
The idea of private currency as a claim on products or services produced makes economic sense
With tens of millions such currencies in circulation, constantly being traded on futures, options and foreign exchange markets, it might sound as if the “money” would be unusable because transactions would be unbearably complex for people to deal with. But as I wrote in “The Financial Times", that’s not the world that we will be living in. This is a world of transactions between my virtual me and your virtual me, the virtual supermarket and the virtual government. This is my machine-learning AI supercomputer robo-advisor, or more likely my mobile phone front end to such, communicating with your machine-learning AI supercomputer robo-advisor.
These robo-advisors will be entirely capable of negotiating between themselves to work out the deal. Dr. de Bono foresaw this in his pamphlet, writing that pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction… the same system could match demands and supplies of financial assets, determine prices and make settlements. He also wrote that the key to any such a system would be “the ability of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties,” an early vision of what we might now call the reputation economy that I explored in my previous book “Identity is the New Money.”
Now, two decades on from Dr. De Bono's ideas, we have the technology to implement them: tokens. Token technology really took off with the development of the ERC-20 standard back in 2015. ERC-20 defined a way to create a standard form of token in a “smart contact” on the Ethereum blockchain. (Ignore the language here : they are not smart and they are certainly not legal contracts, they are a special kind of application that executes on the blockchain). The use of these ERC-20 tokens to implement ICOs has exploded last year. Filecoin, the company that plans to monetise unused computer storage noted in the Economist article above, raised $50m+ in token pre-sales to Silicon Valley investors (including Sequoia Capital and Andreesen Horowitz) and another $200m in a public token sale. That came not long after Tezos, which is developing a blockchain competitor to Ethereum, raised $232 million and Bancor raised $153 million in three hours.
Whatever you think about the sanity of these huge valuations, tokens may make a real difference to the way the economy works. When the current craziness is past and tokens become a regulated but wholly new kind of digital asset, a cross between corporate paper and a loyalty scheme, they will create a new and more efficient marketplace. In this market, company performance rewards private money holders by improving the exchange rate against other private monies. No coupons and dividends, no clearing and settlement, no hiding the number of tokens out there. The cost of trading these tokens will be a fraction the cost of trading stocks and bonds, which is why liquidity will seep out of existing markets and into these new and more efficient structures. Stephen McKeon, a finance professor at the University of Oregon, summarises this imperative by saying that assets of all kinds will tokenise because they will lose the “liquidity premium” if they do not.