The future of money

Written by Ciaran Ryan. Posted in Journalism

It lies in the cryptosphere – and what’s coming should terrify national governments. From Moneyweb.

The problem with all currencies is that their values are unstable. The ‘stable coin’ addresses this by spreading assets over the top currencies in the world and gold. Image: Chris Ratcliffe, Bloomberg
The problem with all currencies is that their values are unstable. The ‘stable coin’ addresses this by spreading assets over the top currencies in the world and gold. Image: Chris Ratcliffe, Bloomberg

Every generation or so money goes through an evolutionary shift, and 10 years from now the fiat currencies currently in use will be regarded as relics of a bygone age, much like the fax machine.

Cryptocurrencies backed by artificial intelligence (AI) are about to swarm the world of money, bringing with them a level of stability that central banks promised and never delivered. About to come is a whole new architecture for the world financial system, including investment.

In the world of investing, the days of the brilliant stock picker may be numbered. AI and predictive technology will swallow them whole. 

New cryptocurrencies promise everything a unit of money should offer in a technological age: a globally accepted unit of value, instant transfer, anonymity, and security.

All currencies suffer one critical deficiency: their values are unstable. That’s largely a function of central bank control over the issue of new money and the resulting inflation which eats at currency values. This complicates the world of commerce since all trade rests upon a floating barge of variable currency value.

South Africans understand what this means. The rand is the world’s most traded emerging market currency.

Back in the 1970s a US dollar cost 70 cents in the rand. Today one US dollar costs R14.60, which is nearly 21 times more expensive than 50 years ago.

This might be an extreme case, but all currencies in a free-floating system suffer the same problem.

Bitcoin attempted to change all this by removing money issue from the control of any central banks. There will never be more than 21 million bitcoins in issue. Since its launch in 2009, Bitcoin has gone from nothing to more than $12 000, making it the world’s best performing currency in the last decade.

Read:Bitcoin plummets to a six-month low on China crackdown (November 2019)

Bitcoin climbs higher after surging through $8 000 level (January 2020)

The cryptouniverse has been defined by bitcoin and a few lesser coins powered by speculative interest and wild swings in value.

None so fast as a credit card

But as a payments system, none have been able to replicate the speed and convenience of a Visa card system with payment executed in seconds. That will change as technology and transaction speeds improve.

Lars Holst, founder of London-based crypto exchange GCEX, has studied the future of money for years and believes Africa is ripe for a crypto monetary revolution.

“I don’t think we are far away from replicating Visa and Mastercard payments systems in terms of speed. The whole settlement system in forex is inefficient,” says Holst, who previously worked in forex at Danish-based Saxo Bank.

“Why should it take two days to settle forex payments? And the fees you are charged for this are excessive.

“The fiat money system has been corrupted by central banks printing excessive amounts of money and debasing the currencies.

“Many of the new cryptocurrencies coming to the world take this power out of the hands of central banks. It’s clear that the future is in crypto rather than fiat currencies.”

Bitcoin founder Satoshi Nakamoto and others have applied themselves to the question of a future money system using blockchain technology to verify and validate payments between two people transacting anywhere in the world.

In 2009, Satoshi explained the problem with the current fiat money system that inspired bitcoin: “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

Identity will be central to the future of money

The current monetary system Satoshi complains about is a relatively modern confection. As David Birch points out in his book Identity is the New Money, we entered the world of fiat currency when Richard Nixon ended the convertibility of the US dollar into gold in 1971. As such, fiat is relatively new. The next evolution is now about to sweep it aside.

“Just as the machine-made, uniform, mechanised coinage introduced by Isaac Newton in 1696 better matched the commerce of the industrial revolution, so we can expect some form of digital money will better match the commerce of the information age,” writes Birch.

Holst argues that fiat currencies, if they exist in 10 years, will have a small portion of the market. “We’re in the era of not just data, but information. We upload information to blockchain in encrypted form so it is not seen by other people. By 2030, we’ll see more private use of what people decide to do with their value. They will have simple keys to keep this information private in a global public network where it is logged but cannot be changed.”

What is about to be let loose on the world should terrify national governments and central banks.

Who in Zimbabwe or Venezuela would not ditch their corrupted currencies for something that is stable, internationally recognised, and beyond the reach of their governments?

The impact of cryptocurrencies on developing countries will likely be huge.

Vodacom and Safaricom launched the M-Pesa mobile money service in Kenya and Tanzania in 2007, allowing users to deposit money into an account stored on their cellphones and transfer funds using PIN-secured SMSs to other users – and redeem cash instantly.

Millions of previously unbanked people now have a payment system that bypasses the banks and is being studied around the world. It’s a relatively small step from this to the cryptosphere and monetary independence.

Read: Regulators walk the ‘mobile money’ line

There is plenty of talk about money moving into the digital age, but we’re already there: cash accounts for only about 4% of the total money in the system. The poor – those without bank accounts – rely heavily on cash, but this comes at a cost.

Going fully digital removes the cash register, the ATM and the cash transit vans.

Cash is acceptable to vendors because its value is certain and, while counterfeit notes are known to exist, they are insufficiently plentiful to disrupt commerce.

Enter the stable coin …

Gregor Kozelj is the developer of the X8 stable coin, one of several stable coins offering currency stability by spreading assets over the eight top currencies in the world as well as gold.

Kozelj is a former portfolio manager who spent several years developing a technique for portfolio risk management that did not rely on predicting whether asset prices would go up or down, but on measuring and limiting downside risk. He then translated his system to investments and banking, where treasury systems could be stress-tested in milliseconds rather than the months it previously required.

It was out of this experience that he developed the X8 stable coin. Backed by AI, it is designed to fight inflation through artificially intelligent reweighting of the eight underlying currencies and gold.

As its name implies, the X8 stable coin is not intended to shoot for the stars, as many investing in bitcoin are hoping for. It is designed to hold its value, neither rising nor falling no matter what turbulence befalls the underlying currencies.

Many companies attempt to replicate this by spreading their cash over multiple currencies, but this is both expensive and unwieldy. There are simply too many moving balls to do this efficiently. Each time someone invests in X8, new X8 coins are ‘minted’ and cash is transferred into the eight underlying currencies and held at custodian banks. Once you are part of the stable coin universe, you are able to make payments on the blockchain without using bank transfers.

Global money decentralisation

“Many people say we are entering the age of AI, but we are already there,” says Kozelj.

“I don’t see much future for fiat money 10 years from now. Fiat will probably still be in use, but I see the global monetary system being decentralised and taken out of the hands of central banks, which was the original vision of bitcoin and blockchain. In a decentralised world, anyone will be able to mint their own currencies. Whether they will be accepted by others or not is another question. But there will be many different cryptocurrencies that will achieve broad acceptance.”

There are more than 5 000 cryptocurrencies, and a handful of these are stable coins.

Tether was first to be launched and is a crypto coin that aims to be linked 1:1 with the US dollar. Then came True USD, USD Coin, both linked to the US dollar, and Stasis Euro, backed by the euro.

Investing in this new world

Just as money is going through an evolutionary shift, so too is the world of investment. Advances in AI and quantum computing will connect us based on an intimate profile of each individual’s investment risk tolerances and appetite, and furnish opportunities not presently available, says Kozelj.

“AI will be able to track movements of capital and changes in competitiveness of economies around the world and adjust your stable coin weightings at any given moment to provide money where it is needed, where it is most productive, so it is working for you. It will likewise revolutionise the world of investment by measuring in real time opportunities to maximise returns and growth on a global basis.

“Where Bitcoin has got it wrong, it accused central banks of printing money,” says Kozelj. “But central banks have a mandate to support their economies with whatever it takes.”

He adds: “History shows us that if you are not adapting to the changing economic environment, you need new money to purchase new productivity growth, which includes innovations. If the same amount of currency is in circulation, people cannot buy the new things even if such innovations would change lives and businesses for the better. It blocks progress.

“Every time we went back to the gold standard, which happened a lot in history, it was abandoned. Is gold that bad? No, it only failed because you cannot adjust the volume of gold in synchronicity with the rate of innovative, real productivity growth to keep the economy and prices stable.

“Naturally, runaway money printing isn’t good, yet fixed money supply is just as dangerous and both invariably lead to instability. Bitcoin has and will continue to have the same issue – it will have a fixed supply in the future. AI-driven stable coins are one way to overcome this problem.”

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.