The Future of Digital Currencies

“Ah, but it’s digital now.” “Digital” is a word whose origin lies in the Latin digitalis, from digitus (“toe, toe”); now its use is synonymous with computers and televisions, cameras, music players, watches, etc., etc., etc. But what about digital money or even digital democracy?

The printing press in its time provoked a revolution, which many hailed as a democratic force for good. The books available to the masses were indeed a revolution; and now we have e-books and technology devices to read them. The fact that the original words are numerically encoded and decoded back into words electronically does not mean that we believe less in the words we read, but we still prefer the aesthetics of a physical book to a piece of high-tech plastic that needs to recharge its battery to keep working. Can digital currencies like bitcoin really contribute to positive social change in such a spectacular way?

To answer this, we need to ask ourselves what about money, how do we understand it, use it and incorporate it into a sustainable model of a ‘better world for all?’ Money, unlike any other form of property, is unique in that it can be used for anything before it happens. It does not imply anything, but it can be used for great good or great evil, and yet it is only what it is despite its numerous manifestations and consequences. It is a unique, but much misunderstood and misused commodity. Money has the ease of buying and selling and the mathematical complexity that financial markets show; and yet there is no notion of egalitarianism, moral or ethical decision-making. It acts as an autonomous entity, but is also endogenous and exogenous to the global community. It has no personality and is easily interchangeable, and yet it is treated as a limited resource in a global context, whose growth is driven by a set of complex rules that determine the way it can behave. Yet, despite this, the outcomes are never completely predictable and, moreover; adherence to social justice and aversion to moral insolence are not prerequisites for its use.

In order for a currency to perform effectively the financial functions required of it, the essential value of money must be the generally accepted belief of those who use it. In November 2013, the US Senate Committee on National Security and Government Affairs recognized that virtual currencies are a legitimate means of payment, an example of which is Bitcoin. Due to the very low transaction fees charged by the ‘Bitcoin network’, it offers a very real way to enable the transfer of funds from migrant workers who send money back to their families without paying the high transfer fees currently charged by companies. The European Commission has calculated that if the global average remittance is reduced from 10% to 5% (the ‘5×5 initiative’ supported by the G20 in 2011), this could result in an additional $ 17 billion flowing into developing countries; using a blockchain would reduce these fees to almost zero. These wealth transfer companies that extract wealth from the system can become de-mediated by the use of such infrastructure.

Probably the most important thing to note about cryptocurrencies is the distributed and decentralized nature of their networks. With the growth of the internet, we may only be seeing the ‘tip of the iceberg’ in terms of future innovations that could harness the untapped potential to enable decentralization, but on a scale never seen before. So, while in the past, when there was a need for a large network, this could only be achieved by using a hierarchical structure; with the consequence of the need to hand over the ‘power’ of that network to a small number of individuals with a controlling interest. It could be said that Bitcoin represents the decentralization of money and the transition to a simple systemic approach. Bitcoin represents an equally significant advancement as peer-to-peer file sharing and Internet telephony (Skype for example).

There are very few explicitly produced laws for digital or virtual currencies, but there is a wide range of existing laws that can be applied depending on the country’s legal financial framework for: taxes, banking and money transfer, securities regulations, criminal and / or civil law, consumer rights / protection, pension regulations, goods and supplies regulations and others. So, the two key questions that bitcoin faces are whether it can be considered a legal tender, and if it is an asset, then it is classified as property. It is common practice for nation states to explicitly define a currency as the legal tender of another nation state (e.g. the US dollar), preventing them from formally recognizing other ‘currencies’ as a currency. A significant exception to this is Germany, which allows the concept of a “unit of account” which can therefore be used as a form of “private money” and can be used in “multilateral clearing circles”. In the second circumstance to be considered property, the obvious difference here is that, unlike assets, digital currencies have the capacity to divide into much smaller amounts. Developed, open economies are generally permissive to digital currencies. The United States has issued the most guidelines and is very represented in the map below. Capital-controlled economies are effectively controversial or hostile by definition. As for many African and several other countries, this topic has not yet been addressed.

Starting from the principle of democratic participation, it is immediately obvious that bitcoin does not satisfy the component of positive social impact of such a goal insofar as its value is not one that can be influenced, but is subject to market forces. However, any ‘new’ cryptocurrency can offer democratic participation when a virtual currency has different management and issuance rules based on socially grounded democratic principles.

So what if a “digital” currency could provide a valid alternative to existing forms of money in playing a positive role: the goals of promoting a socially inclusive culture, equality of opportunity and promoting reciprocity; which are, as their name implies, alternative and / or complementary to the official or national sovereign currency? Virtual cryptocurrencies such as bitcoin are a new emerging dynamic in the system; although in its infancy, the pace of cryptocurrency innovation has been dramatic.

There are many factors that determine the ‘effectiveness’ of money to bring about positive social and environmental change; pervasive political ideology, economic environment, desire of local communities and individuals to strive for alternative social outcomes while striving to maximize economic opportunities, building social capital and much more. If the local digital currency could be designed to build additional resilience in the local economy and improve economic performance, then the introduction on a broader basis deserves research. When the current economic system fails, it manifests itself in the following ways: increased social isolation, higher crime rates, physical abandonment, poor health, lack of a sense of community, among other undesirable social influences.

Is the future digital?