It’s my firm belief physical money, coins and cash, are on the verge of extinction. Not just that your ‘paper money’ will exist in digital form, but it’s only a matter of a time before the primary global currency is a ‘crypto-currency’. A crypto-currency is a currency like Bitcoins, rooted in cryptography and created digitally. More on that shortly.
I also think we might just be at the beginning of a whole new monetary system, one controlled by communities of people, a peer-to-peer regulated system.
In finance, it’s a given that old antiquated business models can’t survive unless they innovate and evolve. And one of the most ancient, old-fashioned systems in operation is the monetary system.
Sure there are fancy financial tools like MBS’s, CFD’s, derivatives of derivatives, monetary easing, and a whole raft of other complexities. But simply, economies are driven by demand and supply. And money is just an intermediate in financial transactions.
Now I don’t know about you, but I’m sick of unpredictable markets, governments printing money to buy things they can’t afford and incurring debts they’ll never pay off.
Not to mention stealing money from hard working people. It just makes me wonder how long society will put up with it?
The key question when it comes to the monetary system is, ‘Is there a better way?’ With the world in economic limbo, there’s a reason why we should seek an alternative system.
But as for your money in the bank…have you ever wondered what it really is? I can tell you that it’s not sitting in a vault so you can just go and pick it up all at once from your local branch.
It’s really a bunch of binary numbers, a whole heap of 1’s and 0’s that exist on computer networks and servers.
What’s important to understand is that this new wave of crypto-currencies is not too different from how your money currently exists. But what makes crypto-currency more appealing is a central bank can’t just come along and ‘print’ more of your crypto-coins and devalue your wealth.
So what does the future of money look like? As technology and innovation advance, so does the way we transact, bank and deal with money.
If we look back at the 1950’s, the bulk of people were paid by cash or cheque. If they decided to bank their money, they had to physically go to the bank.
If they needed cash for the weekly groceries, they had to get the money from the bank teller. Because of this money would shuffle about the world physically transported from A to B.
It was inefficient and security was an issue, but at least it gave people like Ronnie Biggs and Joseph ‘Specs’ O’Keefe a career in robbing banks.
But people started to tire of always going to the bank for money. So in 1969 (in New York) you could use a coded card (assuming you were a Chemical Bank customer) to withdraw money from an Automatic Teller Machine (ATM). Today there are an estimated 2.2 million ATM’s worldwide.
With ATM’s came bank cards, debit cards and credit cards. This meant people didn’t have to carry cash around anymore. In fact we didn’t even need the cash in our account, thanks to credit. We could simply use a plastic card to buy things.
Then thanks to the internet, we could simply transfer funds to other accounts or merchants. We had no need to physically go to a bank anymore. So bank outlets have slowly been shut down.
Now we have online banks that don’t even exist in the physical world; they’re 100% online (e.g. UBank).
You can also have a ‘wallet’ on your phone to store your bank details to pay retailers. You can even touch your phone with another phone or merchant terminal to instantly transfer or pay money. This is thanks to a tiny piece of technology called Near Field Communications (NFC).
In a number of African countries many people are ‘unbanked’, meaning they have no bank account. Because of this, countries like South Africa, Kenya and Uganda have payment systems that are processed via text messaging.
You get paid with a text message and buy your goods and services the same way. It’s called Mobile Money and it’s run by phone companies like the MTN Group. Physical cash and coins in these places have already disappeared.
And there’s more evidence to suggest Western countries will stop using cash and coins completely. The American Institute for Economic Research has found that in Sweden only 3% of money in circulation is made up of physical money. In the US that figure is 7% and falling.
Think about the last time you went grocery shopping. Did you pay with cash or card? Or when was the last time you bought plane tickets with cash, or a cheque? It’s again likely you paid via card, Electronic Funds Transfer (EFT) or BPay.
This all hit home with me last Sunday afternoon. I headed down to my local 24/7 Coles in Elsternwick (a 24/7 supermarket is the greatest thing in the world by the way). I grabbed a few supplies for Sunday’s dinner and headed to the self-serve checkout.
What got my attention, and backed up my point that cash is dead, was the queue for the ‘Card Only’ self-checkout machines had the longest queue out of all available methods. Also, every single terminal had facilities for ‘PayPass’.
This is where technology is taking us. I wrote in last week’s Markets and Money how algorithms drive our digital world. And that this was in part because of our desire for more and faster information.
Because of this demand for faster information, we also demand speed in financial transactions. Terms and acronyms like Netbank, EFT, BPay, PayPal, NFC and Bitcoins are part of our day to day vocabulary.
All of these are faster and alternative ways of processing money. They’re all digital and they’re all driven by complex algorithms that make up electronic financial systems.
And over the last couple of years a legitimate currency alternative has come to the fore. The beginning of a monetary revolution. And if you haven’t heard of Bitcoins by now, you’ve been living under a Sony BetaMax or a Toshiba HDD Player.
Let’s for a moment sweep aside the insane price movements of Bitcoin, which have seen the value of one coin peak on Wednesday at $266USD and plummet to an intraday low of $105USD.
The technical explanation of Bitcoins deserves about 10 articles worth of information. And I’ve been following them since late 2009 when the price was $0.05USD, so I’ve seen the ups and downs and get how they work.
Bitcoins at their esoteric heart are a (kind of) decentralized digital currency. To be more technically correct they are a crypto-currency (a currency created and based on cryptography). A centralised financial system does not control or regulate them. A community controls them, and transactions (although visible) are shrouded in a veil of anonymity.
This is partly the reason for its recent price movement. And when you look through the hype and hysteria surrounding Bitcoins, you can see an underlying need for an alternative solution to the current financial system.
Do you think Bitcoins would have seen so much activity if the world had been in financial harmony? I doubt it. I doubt they’d be US$266 a coin, and more like $7.
The current hype surrounding Bitcoins started when the Cypriot government decided they were going to steal money from bank deposit holders. This sent the price of Bitcoins through the roof as fear grasped southern European states and the world realised no one’s money is really safe.
Because if you were a Cypriot and had held Bitcoins there’s no way any government or bank could have taken or stolen your Bitcoins. And even if they wanted to, they wouldn’t know which Cypriots had them because it’s anonymous.
Bitcoins might just be the alternative non-government financial solution the world has needed, particularly over the last 5 years.
And I see a future where a crypto-currency (likely Bitcoins) will be the primary global currency. Others will exist and sit alongside Bitcoins. Already there’s a RuCoin which is a Russian evolution of Bitcoin, Terracoin and LiteCoin. All are various crypto-currencies which are used, stored, traded like normal currency. Bitcoin is just the first.
But the current problem which will hamper the progress of these crypto-currencies is instability in the price. It’s difficult to go and buy a pair of shoes with Bitcoins when literally 2 minutes later you might have been able to buy 2 pairs.
No one knows exactly what one Bitcoin is actually worth.
For a crypto-currency to thrive, it needs to detach from being linked with a cross paper currency altogether. If Bitcoins were only exchangeable with Terracoins, we might actually have a legitimate currency system. It would weed out speculators and possibly enable some stability in the crypto-currency markets.
Businesses are slowly but surely accepting crypto-currencies as legitimate payment, more are coming on board every day. Already there are hundreds if not thousands of businesses accepting Bitcoin, Litecoins, Terracoins and RuCoins as payment.
It will only take one big global corporation like WalMart, Apple or Virgin to accept one of them for us to have the start of a whole new financial system.
for Markets and Money
Ed Note: Sam Volkering is assistant editor and analyst for a new breakthrough technology investment service to be launched by Money Morning editor Kris Sayce. The breakthrough technology service will introduce cutting edge investment ideas from the technologies of the future, including medicine, science, energy, mining, and more.
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