The End Of Money Is Nigh
The real fintech revolution is more radical than you think.
Dateline: Woking, 27th November 2021.
The financial services of the future, the financial services we will have after the real fintech revolution, will be the ones that tackle the real problem of the future: Not the problem of helping college kids in San Francisco to split a bar tab without talking to each other but the problem of helping everyone (and I mean everyone) to better financial health through better management of assets. One way will be to turn investible assets into money (or, at least, new kinds of assets that function in money-like ways in certain circumstances).
Noted Fintech investor Matt Harris, a partner at Bain Capital Ventures, recently predicted that fintech would mean the end of money as we know it. He wrote that rather than money as we know it, in the future "our assets will be 100% invested at all times". In this apparently radical vision of the future of money, transactions will be settled through the transfer of baskets of assets between counterparties without the intermediary of money.
The logic of this argument is actually straightforward. In an always-on world, what is the point of paying fees to sell assets, buy currency and then transfer currency to someone who is going to sell it to buy other assets. In a time before networks, when strangers came to do business, they preferred to trust money rather than each other. Today, they prefer to trust card authorisation systems. In the future, neither of these will be necessary. If you can be sure of the ownership and value of the assets, then you can just use the assets.
You sell me an NFT, I’ll pay you half in Bitcoin and half in IBM stock. I sell you a car, you pay me in Giants tickets, office space and a square inch of the Mona Lisa. It doesn’t matter whether you want Giants tickets or not. There is no problem with what economists refer to as the “double coincidence of wants” because assets can traded away, instantly, around the clock and across the metaverse. Somewhere out there is someone who has the tabletop model of a Tarrasque that I want and who wants the Giants tickets or something that I can swap the Giants tickets for. These trades can be completed between supercomputers in milliseconds to deliver to the counterparties with precisely what they want.
This world, in which assets are constantly on the move, sounds crazy - but Matt is right. This view of the future of transactions, that money is an intermediary that disappears because assets can be traded as money-like instruments, is what got me interested in the future of money in the first place, many years ago, when I came across “The IBM Dollar”.
The IBM Dollar
The Centre for the Study of Financial Innovation (CSFI) is a London-based think-tank that has, for many years, been exploring the future of the financial services industry. The CSFI is a charity, and I am proud to say that I have recently become a trustee, but my admiration for the organisation and its work goes back many years because it has always led debate about the impact of new technology across the financial sector and is known for bringing together informed opinion to discuss key issues.
Way back in 1994, I picked up a report from the CSFI written by Dr. Edward de Bono, known to many as the inventor of "lateral thinking" and to others as the inventor of the coloured hats for thinking. Dr. de Bono, who his Guardian obituary said was “rarely burdened with humility” passed away this year at the age of 88. Dr. De Bono's pamphlet had an immediate impact on me, coming as I did from the technology side of electronic payments and money. It was called "The IBM Dollar".
The heart of the vision that de Bono set out in the pamphlet was that IBM 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.
The difference between IBM stock and IBM money, to continue this example, is that IBM stock is a claim on something that is exchanged through intermediaries. But IBM money is, well… money. Or at least, money-like. It is a bearer instrument that can circulate freely until it is used to obtain some service from IBM at which point the IBM Treasury can decide whether to remove it from circulation (i.e., burn the token) or put it back into circulation by using it to buy something. The Treasuries of different companies might adopt different approaches to the circulation of their money, different “monetary policies”, as part of their competitive strategies.
Token Time
At that time, a generation back, this was highly speculative thinking. However, the emergence of the first electronic cash technologies (such as Mondex and Digicash) meant that the idea of unforgeable interchangeable electronic bearer instruments that could not be double-spent (i.e., fungible tokens, as we now call them) was no longer science fiction.
When first I read de Bono's ideas of tens of millions of tokens in circulation, constantly being traded on futures, options and foreign exchange markets, I was shocked: Shocked because I immediately realised that he was right. Remember, he was imagining this before the internet, but thinking deeply about what the future of high-speed electronic networking and high-powered cryptography would mean for financial services. He had come to the conclusion that if you could exchange baskets of these liquid assets directly between counterparties then you would not need to exchange them into money first.
Now this apparently strange world of money-like assets in continual motion might at first seem unbearably complex for people to deal with. But that's not the world that we will be living in. This is not a world of transactions between people but, as I wrote in my book "Before Babylon, Beyond Bitcoin", transactions between between what Jaron Lanier called "economic avatars" and what I lazily call bots. 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 to work out what basket of tokens it wants from you in return for one of my books, or a day of my time at a workshop or a speech to your conference.
Identity Is The Enabler
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".
This last point is rather important, and why I want to highlight Matt's bold prediction. Matt goes on to write that "once identity is solved, credit risk becomes easier". This is because of the nature of reputation in an online world. Reputation, such as credit history, that is immutable and available to any counterparty becomes the fundamental transaction enabler with the potential to displace the incentive functions of commercial banking.
Or, to put it more simplistically, once you know who everyone is, payments are easy. .
It will be the reputations of individuals, businesses, organisations that will be the fundamental enabler of commerce. Now, this dependence on reputation does not mean we must surrender to a dystopian future of total surveillance. Indeed, as Matt goes on to write in his Forbes article,
For this digital, embedded, and decentralized world to reach its full potential, there are meaningful problems to be solved. We must be able to establish identity, at point of transaction and over time, even if pseudonymous.
Note that final point. Even if pseudonymous. This the same perspective as set out in the recent G7 report on Public Policy Principals for Retail Central Bank Digital Currencies (CBDCs) which states, in Principle 1, that “The identity of a CBDC user would need to be verified/authorised by at least some regulated entity in the CBDC ecosystem, but not necessarily all”.
This view of what we might term a reputation economy and why, as I wrote in my 2014 book on the subject “Identity is the New Money” that it will be reputation rather than regulation that will animate trust in economic exchange.
When it comes down to it, then, enabling the financial transactions of future generations that Edward and Matt accurately predict rests on doing something about digital identity
Pseudonymity Settlement
I think the way forward is obvious, and relies on distinguishing between the currency and the wallets that it is stored in. Some years ago, when head of the IMF, Christine Lagarde spoke about CBDCs, noting that digital currencies "could be issued one-for-one for dollars, or a stable basket of currencies" she said
Central banks might design digital currency so that users' identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law.
As a fan of practical pseudonymity as a means to raise the bar on both privacy and security, I am very much in favour of exploring this line of thinking. Technology gives us ways to deliver appropriate levels of privacy into this kind of transactional system and to do it securely and efficiently within a democratic framework.
In particular, new cryptographic technology gives us the apparently paradoxical ability to keep private data on a shared or public ledger, which I think will form the basis on new financial institutions (the "glass bank" that I am fond of using as the key image) that work in new kinds of markets.