Ever since humans realized they could be better off by trading with one another, how trading was facilitated constantly changed. A long time ago people were just trading goods for goods. Like for example if we wanted cabbage and we couldn’t grow it ourselves, we could find someone who grows it and trade potatoes for it, or whatever we had.
But that was only until people realized that they could trade stuff by using precious metals as facilitators.
Gold, silver, and bronze became the way that people translated the value of a Kg of meat into a quantity of metal, that they could later trade for something else. In this way, if a person wanted to trade meat for cabbage but the other party didn’t need the meat, the first person could find someone and trade his goods for silver. He could later return and use the newly acquired currency to buy some cabbage.
As you know metals are not the most practical way of translating value, meaning that they are both scarce and they require a certain level of processing.
As the world’s population grew, trade and wealth grew as well, which meant more demand for precious metals that would be inefficient all of a sudden.
Because of that people came up with a new idea. What if we could all agree that a piece of paper is worth a certain value? So they invented the banknotes and everyone agreed that as long as I believe this is worth something, and you believe the same, we can have a financial system in place.
However, as society kept lusting for growth and innovation, technological advancements continuously appeared. We started looking for even more efficient ways of trading with our peers. And, the adoption of the internet combined with the globalization movement of the last decades produced the perfect opportunity for people to switch from physical cash to digital equivalents. In this way, there was no more a need for people to meet face to face for value to be transferred. Banks and financial institutions have got us covered via international and local network systems like SWIFT.
In case the term is unfamiliar, SWIFT represents The Society for Worldwide Interbank Financial Telecommunication. Their objective is to offer dependable financial messaging solutions that link over 11.000 banks and financial institutions globally.
So, now we have this financial system in place, that is supposed to exchange money fast, across borders, and from one institution to another. While there are different country regulations in place, and also exchange and processing fees? Not to mention the inconvenience of having a third party always needing to accept transfers between peers. I think we can all agree since we know that innovation is inevitable, that the next years will bring a disruption in the financial landscape.
Because of that, digital money is the next idea that might take the spotlight on our financial systems.
These currencies are referring to any form of exclusively electronic means to exchange value. And to this moment there are 3 categories of such digital money:
- Central Bank Digital Currency
- Cryptocurrencies
- Stable Coins
All of the above-mentioned solutions to the digitalization of currencies have a very high potential for creating a more efficient, inclusive, and transparent financial system. For example, in the United States, some people can not use the services of a bank, but they can access cryptocurrencies like Bitcoin or Ethereum from any smartphone connected to the internet and join the financial system.
And that’s not all, digital money can facilitate faster and cheaper transactions compared to traditional payment systems. What that means is that such currencies will cut the need for intermediaries to process payments and this will not only cut costs but also create a direct and fast flow of the currency. And there is something more. The payment is done once and can not be canceled or changed. It’s like cash switching hands. That is different from nowadays options like Paypal or bank transfers where we get a period of time at our disposal to turn around the decision.
Also, digital currencies in the form of cryptocurrencies feature public ledgers that can add a new layer of safety and transparency to our transactions. Once a transaction is made, a block is created and the transaction is forever encrypted in that block. We say forever because for anyone to change the details of the transaction, it would require more than half of all the computers on the decentralized network to accept the change as being true. And that is probably never going to happen since every such computer or miner has a real-time updated copy of all the transactions and works independently from others.
And since it’s all happening on the internet, the borderless transaction will be made possible in seconds rather than days. We will be able to transfer value overseas in a fraction of the time that we do today and for a fraction of the cost.
There are even more opportunities that such digital currencies are creating - from smart contracts to micropayments and peer-to-peer lending, we are in for an exciting time. With smart contracts, we can switch real valuable assets, or services, without the need for a third party to validate the transaction. People will be able to buy a house just by having their details encrypted in the blockchain naming the transaction and their name as the new owner of the house. And since blockchain history can not be changed, we will have a clear view of all the details regarding the transactions that ever took place regarding an asset such as a house.
But it is unfair to say that all of this comes without challenges. In fact, the reason that we are not adopting such digital currencies at a global level already is because of the threats that we might face if we hurry too much. For example, by having a fully digital financial system we will have an increased risk of cyber attacks. Nobody wants to wake up one day and realize their phone got infected with a virus that led to their e-wallet being emptied.
Even more so, due to the high volatility rate of cryptocurrencies, people find it hard to believe that these will ever serve as something more than speculative investments. The volatility rate measures the fluctuation of the price over a period of time, the higher the volatility rate is, the riskier the currency is.
And while that’s debatable, cryptocurrencies are not the only option for digital currencies. Look at the Bahamas and its Sand Dollar digital currency.
By implementing such Central Bank Digital Currencies( CBDC) governments are getting rid of the volatility and uncertainty associated with currencies like Bitcoin but they face another challenge. As the currency is fully digital, an electronic trail will be left every time a transaction takes place. This leaves room for a highly debated privacy infringement problem. The government will keep track of every transaction that one makes.
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