Editor’s note: this is the third and final installment of the series in which we are looking at how money evolved, with the aim of helping people understand why cryptocurrencies are the next in line. You can read — you should actually — the first installment here and the second installment here
At the very core of the existence of money is the profound question of how we can exchange value in more Transparent, Trustworthy, Quick and Efficient ways. Regardless of what numbers and formulas that economists might throw around, every stage in the evolution of money has simply sort improve these four features based on the level of globalization at each stage.
From the days bartering, the need for better ways to exchange value has been the puzzle. Even after cryptocurrencies go mainstream, if they ever do, the profound question of how to improve the way we exchange value will remain and will likely bring about more innovative ideas of money to fit the next stages of globalization.
The Economic Impact Of The Internet Has Necessitated The Need To Rethink Money
Fundamentally, the current need for a new kind of money that is more flexible and digital in nature finds its root in the impact that the internet has had on globalization. Between 2005 and 2011 alone, the internet was responsible for 21 percent of the GDP growth in established economies, according to a report from McKinsey Global Institute. The researchers also noted that, if the internet were to be classified as a sector, it would bear more weight than the utilities and agriculture sectors.
Drawing from the impact that the internet has had on the world so far, researchers at McKinsey Global Insight posited that the internet would foster the next wave of economic advancements, “supplying engines of growth to regions of the world that have been disadvantaged in the past.” This suggests that the internet will become even more entrenched in how we live and do business.
The Global Village Promise Of The Internet
The promise of the internet is to make the world a global village. The Merriam Webster dictionary defines global village as, “The world viewed as a community in which distance and isolation have been dramatically reduced by electronic media (such as television and the Internet).”
This means that the internet seeks to make us relate with one another as closely as we would in a village setting. This is already happening in many regards. You can already know what is happening in Beijing from your room in Hawaii thanks to the likes of the internet and cable and satellite TV.
You can also buy goods from Beijing from your room in Hawaii thanks to e-commerce. The only existing problem with such purchases is that you won’t have the physical experience and cannot transact (make payments) as though you’re physically present in Beijing. Innovations like the virtual reality and augmented reality are already trying to give us the experience of being in a place that we’re not.
In summary, many of the internet-based innovations that we have today seek to make the world operate as much as a global village as possible.
The Problem With Using Fiat Money On The Internet
But the experience of being able to transact or make payments as we would physically do in Beijing is still wanting, even though we have several ways to transact electronically. And the fact that these options for transacting do not offer the efficiency, speed, trust and transparency of a physical presence makes the world less of a global village than the internet seeks.
The non-internet structures that we’d been operating have some in-built hurdles that would limit the advancement of the economic globalization that the internet has brought. The inefficient use of fiat money on the internet is one of the hurdles.
The first thing to realize is that the internet has given birth to a new kind of economy, given that it’s now getting to the center of how we live and do business. Simply put, you need the internet kind of money to reap the full economic benefits that the internet offers, just like the industrial age saw the birth of gold-backed paper money and subsequently fiat money.
The internet has been fostering a trust economy that lets you do business with people that you’ve never, and probably would never see. Before the internet, you didn’t need a third party to verify your transaction when you go to get groceries. You simply reach for some cash in your pocket, pay for your groceries and go back home. Period. And the owner of the grocery store didn’t have to pay anyone to be able to receive cash payments. But since doing business over the internet is virtual, a virtual money was needed, which was the main reason that the use of credit and debit cards for payments went mainstream.
Recall that your credit and debit cards reflect the balance of the fiat money you have or borrowed from the bank. This created the need for a third party to confirm that your balance with the bank can cover the purchase you’re trying to make. This third party firm would charge you for its services. The company that issued the card will also charge you for providing you with the infrastructure to make digital payments. The bank will also charge some amount for moving money from your account to the merchant’s account. That’s at least three parties involved when you make digital payments that are driven by the traditional money system.
First, the fact that each of these parties charges money for enabling these capabilities makes it more expensive to do business on the internet than it costs locally. With paper money, the merchant would accept money from at no cost. The only cost we can point to is the cost of transportation to a bank to make deposits.
Second, the fact that so many parties have to be involved, coupled with the fact that money has to move from one bank to another in most cases, makes the process slower to complete. Merchants have to wait two to three days to have access to their payments. The long process to get refunds and the chargebacks that merchants have to deal with are some of the other shortcomings of using fiat money in the internet world.
But we’ve been using the digitized traditional money anyway because we don’t want to miss out on the bigger opportunities that the internet offers. Still, the inefficiencies lurk everywhere, creating the need for an internet’s kind of money.
The Need For An Internet’s Kind Of Money
The internet’s kind of money is one that would allow us to exchange value virtually and make payment virtually, yet with the ease that we’re accustomed to when paying with physical cash at our brick and mortar stores. For this to be possible, the money simply needs to reside online and not in a bank.
This would mean that your virtual self would take money from your virtual pocket/wallet and pay another virtual person, which they would receive into their own virtual pocket, with the money becoming accessible to them immediately, just like in the real world. Refunds are also going to be as straightforward because the merchant can simply send money back into the customer’s virtual money account instantly, just like a refund would work when dealing with paper money.
This is exactly what blockchain-powered money, which we also call cryptocurrency, offers. In short, cryptocurrencies are the internet’s kind of money.
With cryptocurrencies, only the blockchain system that powers the internet money would charge you a single fee — which is extremely low, by the way — for the maintenance of the network. Banks also have a way they charge maintenance fees.
The establishment of a virtual money that resides online also means that we can send money to our friends and family instantly and affordably from anywhere in the world, again because the money doesn’t have to travel from one financial institution to another.
Simply put, cryptocurrencies would help us exchange value in a more Transparent, Trustworthy, Quick and Efficient manner in the internet era that we live in, making them the next logical step in the evolution of money.