Money Makeover – Cryptocurrencies and the History of New Payments
Mar 22, 2021 - 5 min read
This two-part series “Money Makeover” examines the changing role of money and how cryptocurrencies fit into the new world of finance.
What is money?
For most people, money is something they use to buy goods and services. They depend on it and they use it every single day.
Very rarely does money change.
Sometimes, however, it does. Europeans in their 30s or 40s can vividly remember the day when the physical bank notes of the Euro were introduced almost 20 years ago.
For them, the introduction of the Euro was a revolution of sorts. It meant saying goodbye to the French franc, Austrian schilling, and the German mark, to name just a few of the major currencies Europeans were used to. Not only was the Euro a new kind of money, it also impacted the way goods and services were priced and perceived in value.
While this revolution in money was a challenge to the mindset of many people, it also brought a vast array of benefits, including a single currency zone across Europe, enabling easier trade and borderless commerce for people.
Today, similar developments are unfolding – and similar (and ever greater) benefits are on the horizon, thanks to cryptocurrencies.
But money is in the process of getting another makeover as well – thanks to covid-19 – and cryptocurrencies.
The road now taken
It cannot be denied that the covid-19 pandemic has increased the popularity of cashless and contactless payments. And this is thanks to technology.
New and other not-so-new technologies have blossomed during the pandemic, while increasing the convenience and usability of money for payments.
With the advent of card, mobile and biometric payments, a full technology stack has emerged, which can be accessed independent of traditional payment networks. Thus, the adoption of cryptocurrencies as a new payment option has the potential to experience a much faster growth-cycle compared to the transitions from, e.g. cash to card payments or the currently ongoing card to mobile payments cycle.
These qualities make it possible to design crypto payment solutions to handle stable, globally acceptable currencies acting as medium of exchange across time and space. As of today, this might still be somewhat hard to imagine. But then again, at one time it was hard to imagine having a universally accepted currency for 27 different countries in Europe.
Seeds of change
Alongside technological innovations for payments, the covid-19 pandemic has forced a paradigm shift upon nation states and central banks across the globe. Money supply, national debt and deficits have been increasing at an unprecedented rate to stabilize the economy and to finance recovery programs. The decision to undertake quantitative easing has revived fears of inflation and given strength to the arguments of the Austrian School of Economics.
One of its proponents, Friedrich Hayek, a British-Austrian economist, predicted a time when there would be competition between public and private currencies.
Again, that concept might seem strange based on the idea of money as most of us know it today, but it becomes less strange when viewed in a historical context.
Since the gold standard was abandoned by countries around the world between 1931 and 1976, monetary systems have been based on fiat money, managed by central banks. For those who argue that Bitcoin has no intrinsic value, it is worth remembering what “fiat money” actually means.
In fact, the term “fiat money” stems from the Latin word “fiat” (= decree). According to popular definition (and in keeping with monetary economics) fiat money is an intrinsically valueless object or record that is widely accepted as a means of payment.” In other words, Bitcoin and fiat currencies such as the EUR and the USD are very similar in nature, such that its value is based on perception, with one major difference: Bitcoin has a fixed supply, while EUR and the USD can be printed any time.
The effects of this unlimited supply of fiat money, in this case USD, are dramatic:
The purchasing power of the US dollar over the last century has fallen by 96.13% compared to 1913: USD 100 back then were worth a mere USD 3.87 in 2019.
What has been the result of this? Trust in central banks to manage price stability has continuously been eroding.
Consequently, private initiatives have started to explore ways to create currencies, which are independent of the influence of central banks, fixed in supply and uncorruptible. The most prominent example is Bitcoin which was launched on 3 January 2009 in response to the global financial crisis and the consecutive bailout programs for banks.
Bitcoin and other cryptocurrencies like it are not tied to any single national authority nor controlled by any single group of people. And yet they are valued by men and women around the world and used (increasingly so) to pay for everyday goods and services.
Just like the Euro…
In the second part of this series, we look at how cryptocurrencies are beginning to fulfill a new role for worldwide payments.