In 2010, the BBC and the British Museum collaborated in a project called “A History of the World.” The project sought to tell the history of humanity over the past two million years by examining one hundred objects from the collection of the British Museum. One of the themes was money, which was represented by four objects: one of the world’s first gold coins produced in Western Turkey over 2500 years ago; one of the first paper banknotes, a 1375 bill from the Ming Dynasty; a “pieces of eight” silver coin from the late 16th Century, used throughout the Spanish Empire as one of the first global currencies; and a credit card exemplifying the increasingly intangible character of money in the modern world.
Money was not necessary when people lived in small communities where they knew and trusted their neighbors and could therefore exchange labor, food or goods in kind. But the need for something like money arose once communities started to expand and people were dealing with strangers they may never see again and could not trust. It has since played a central role in the rise of civilizations and in human affairs of all kinds. Financial innovations have given rise to commerce and economies, enabled the organization of companies and public institutions, and helped communities become more productive and raise their standard of living.
Money is now undergoing another massive transformation – one that may presage the same order of civilizational change as previous eras experienced. The same digital technologies that are transforming most aspects of our lives are now ushering forth the concept of digital money. This historical transition is going to be one of the most exciting and important societal challenges of the coming decades. Its impact will rival other major technology-based societal transformations, including electricity, radio and TV, and the Internet and World Wide Web.
The evolution to a global digital money ecosystem involves a lot more than the transformation of money (cash, checks, credit and debit cards, etc.) from physical objects in our wallets to digital objects that can now be carried in our smart mobile devices. The coming shift encompasses the whole money ecosystem: the payment infrastructures in use around the world; the financial flows among institutions and between institutions and individuals; government regulatory regimes; the systems for managing personal identities and financial data; the systems for managing security and privacy; and so on. Just about every aspect of the world’s economy is involved.
The explosive growth of Internet-connected mobile devices is the driving force behind what we might call the emerging Internet of Money. For the past twenty years, the Internet has been an incredible platform for innovation. In its earlier days, the Internet was truly empowering only for those with the means to use it. But ongoing advances in digital technologies are now benefiting just about everyone on the planet. Mobile phones and Internet access have gone from a luxury to a necessity that most everyone can now afford.
A recent McKinsey & Co. study examined the top twelve disruptive technology advances that will transform life, business and the global economy in the coming years. The mobile Internet was at the top of its list:
Equipped with Internet-enabled mobile computing devices and apps for almost any task, people increasingly go about their daily routines using new ways to understand, perceive and interact with the world. . . However, the full potential of the mobile Internet is yet to be realized; over the coming decade, this technology could fuel significant transformation and disruption, not least from its potential to bring two billion to three billion more people into the connected world, mostly from developing economies.
It’s not surprising that advances in information technologies go hand-in-hand with the growing importance of digital money. Money and information have been closely intertwined from time immemorial. Archaeologists and historians have shown that transactional records are among the earliest examples of writing, long predating the minting of gold and silver coins. The oldest known writing system is assumed to have been developed in ancient Mesopotamia around the 4th millennium BC to keep track of information about economic transactions.
It’s noteworthy that as physical money is being increasingly replaced by its digital representations somewhere out there in the cloud, we seem to be returning to its ancient roots, where keeping track of money was all about managing information. Not only is money increasingly represented by information, but information about money is itself becoming a form of money. Walter Wriston, chairman and CEO of Citibank from 1967 to 1984 – widely regarded as one of the most influential bankers of his generation – famously said: “Information about money has become almost as important as money itself.” I think we can now update his remark to read: “Information about money is money.” Such information is increasingly valuable for personalized marketing, fraud detection and other applications.
Similarly, a recent report by the World Economic Forum, “Personal Data: The Emergence of a New Asset Class,” observed: “As some put it, personal data will be the new oil – a valuable resource of the 21st century. It will emerge as a new asset class touching all aspects of society.” Much of that valuable personal data is related to our past, present and future financial transactions.
In addition, money is inexorably linked to identity and trust. Thus, the transition to universal digital money has to be accompanied by a similar transition to universal digital identity management and to digital trust frameworks. (See Chapter 13, “The ID3 Open Mustard Seed Platform,” by Thomas Hardjono et al.) To be effective, digital money must be accompanied by innovations to help us securely identify individuals as they conduct transactions through their mobile devices.
Throughout the world, many poor people cannot prove who they are. Their lack of a birth certificate or some other identity documents excludes them from participating in many of the activities that we take for granted in a modern economy. The Indian government has embarked on a massive Unique ID (UID) initiative known as Aadhaar that aims to issue each resident in India a unique, twelve-digit number. The numbers will be stored in a centralized database and be linked to basic demographics and biometric information.
Among other benefits, Aadhaar will help poor and underprivileged residents of India participate in the world’s digital economy, and thus to avail themselves of the many services provided by the government and the private sector. Given the considerable benefits that accrue to everyone – individuals, governments and business – we can expect similar digital identity projects to emerge in economies around the world, but especially in nations where a significant portion of residents have few if any dealings with financial institutions.
The emergence of the Internet of Money and new kinds of digital currencies is raising many thorny questions, however: Can digital money ecosystems be based on existing national currencies or do they require entirely new sorts of digital currencies? What about the future of Bitcoin, the most prominent such digital currency?
So far, the development of digital money ecosystems has been almost exclusively based on traditional currencies that all the parties involved understand – e.g., $, £, €, ¥. Most people are reluctant to introduce new digital currencies into the mix, at least at this time, because of the formidable complexities. However, digital currencies, and decentralized cryptocurrencies like Bitcoin in particular, cannot be ignored because they represent significant advances in the development of an Internet-based digital money ecosystem.
The Future of Bitcoin
Bitcoin is both a digital currency and a peer-to-peer payment system. Introduced in 2009, it uses cryptography to control the creation and transfer of money. It’s not backed by central governments or banks. The private Bitcoin Foundation manages its technical standards, security concerns and general promotion. As a currency based on open source software, Bitcoin’s sophisticated protocols are widely available, which has helped boost its usage and prominence.
The rapid growth of Bitcoin has attracted much attention in recent months, not just because of legal issues (the arrest of an alleged black market trader who used Bitcoin; the bankruptcy of a Bitcoin currency exchange) but because of the actual or perceived threats that Bitcoin and digital currencies pose to the status quo.
One of the most prominent recent commentaries on Bitcoin was “Why Bitcoin Matters,” published in the New York Times by Marc Andreessen, the technologist, entrepreneur and investor. Andreessen compares Bitcoin in 2014 to personal computers in 1975 and the Internet in 1993: an embryonic technology poised to take off. His VC firm, Andreessen Horowitz, has invested close to $50 million in Bitcoin-related start-ups and continues to actively search for additional such investment opportunities. In his column, Andreessen pointed out that there is an enormous gulf between what the press, economists and others believe Bitcoin is, and what a number of technologists and entrepreneurs like him are so excited about:
First, Bitcoin at its most fundamental level is a breakthrough in computer science – one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world. . . Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property [e.g., money, signatures, contracts, stocks and bonds] to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.
Andreessen lauds Bitcoin as a new kind of peer-to-peer payment system – “a way to exchange money or assets between parties with no preexisting trust. . . the first Internet-wide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of about 2 to 3 percent – and that’s in the developed world. In lots of other places, there either are no modern payment systems or the rates are significantly higher.”
As a digital currency, Bitcoin has been quite volatile, with large fluctuations in value over days, weeks and months. In early 2014, the exchange rate of a bitcoin was fluctuating between $500 and $900. Its volatility is largely due to speculation and relatively low payment volumes. Despite its positive qualities as a highly secure digital payment system, many believe that the currency’s volatility will likely drive away the vast majority of individuals and merchants. Andreessen disagrees:
The criticism that merchants will not accept Bitcoin because of its volatility is also incorrect. Bitcoin can be used entirely as a payment system; merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want.
A few weeks ago, technology journalist Glenn Fleishman wrote an article refuting a number of Andreessen’s arguments. The article starts out by agreeing that Bitcoin represents a major innovation in payment systems:
I agree with Andreessen that Bitcoin is the first practical, large-scale mechanism to deal with the problem of decentralizing trust – no parties need know each other nor trust each other for transactions to complete successfully, verifiably and irrevocably. . . I also agree completely with Andreessen that Bitcoin can be used for an enormous number of non-currency related purposes in which permanent, irreversible proofs of transactions are required.
But he then goes on to argue with many of the points made by Andreessen, including Bitcoin’s liquidity and low fees, and its claimed advantages in preventing fraud, theft and other illegal activities. This past November, Fleishman published an article in The Economist, “Bitcoin under Pressure,” which carried the tag line: “It is mathematically elegant, increasingly popular and highly controversial. Bitcoin’s success is putting it under growing strain.” He goes on to explain his concerns:
Bitcoin’s success has revealed three weaknesses in particular. It is not as secure and anonymous as it seems; the mining system that both increases the Bitcoin supply and ensures the integrity of the currency has led to an unsustainable computational arms-race; and the distributed-ledger system is becoming unwieldy. Will Bitcoin’s self-correcting mechanisms, and the enlightened self-interest of its users, be able to address these weaknesses and keep Bitcoin on the rails? . . . Perhaps Bitcoin, like the Internet, will smoothly evolve from a quirky experiment to a trusted utility. But it could also go the way of Napster, the trailblazing music-sharing system that pioneered a new category, but was superseded by superior implementations that overcame its technical and commercial flaws.
Fleishman believes that Bitcoin offers an opportunity to reimagine how the financial system can and should work in the Internet era. But he makes a distinction between its future as a technology and its future as a currency. “Bitcoin shows a path for massively more secure, reliable and sensible ways to store value and move it around. As a currency, I have little faith that it will become a replacement for dollars, euros or renminbi. As a model for a future payment and transaction system, I believe it’s already shown its value.”
Fleishman’s conclusion, which I agree with, is similar to that of top payments expert Karen Webster, who wrote at the end of 2013: “Our prediction is that those who are in the best position to exploit Bitcoin’s success will be those who recognize that there’s a difference between the technology that enables Bitcoin and Bitcoin the currency and will invest in perfecting the former and not the latter.”
A number of recent articles have been quite negative. At a panel in the 2014 World Economic Forum in Davos, Yale economist and Nobel Laureate Robert Schiller said that Bitcoin “is just an amazing example of a bubble.” As reported in Business Insider, Schiller said that while he finds Bitcoin to be an inspiration because of the computer science, he does not think of it as an economic advance and views it as a return to the dark ages. Schiller, an expert on economic bubbles, believes that much of its fascination is due to its extreme volatility.
Another Nobel Prize-winning economist, Paul Krugman, chose the title “Bitcoin is Evil” for one of his recent New York Times columns. Krugman’s main reason for his negative views is similar to that of author Charlie Stross, who wrote a strong critique of Bitcoin called “Why I Want Bitcoin to Die in a Fire.” Stross writes:
Like all currency systems, Bitcoin comes with an implicit political agenda attached. Decisions we take about how to manage money, taxation and the economy have consequences: by its consequences you may judge a finance system. . . Bitcoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind – to damage states’ ability to collect tax and monitor their citizens financial transactions.
Finally, there is the question whether Bitcoin and other virtual currencies should be subject to financial regulations similar to those currently in place for existing currencies. Anti-money laundering is one such regulation enforced by governments around the world to curtail illicit activities like the flow of money from the drug trade and the financing of terrorist activities. Bitcoin has been linked to such illicit activities, which has led to a few recent arrests.
Governments have started looking at how to regulate Bitcoin and similar digital currencies.
A recent New York Times article, “More Bitcoin Regulation is Inevitable,” concluded: “The days of anonymous transactions in Bitcoin and operating an exchange with no outside interference are over. As virtual currencies develop, firms devoted to aiding trading, and perhaps even their users, will encounter greater government regulation, along with the costs that come with compliance.”
Most everyone agrees that for the foreseeable future, the bulk of the money flowing in digital money ecosystems will continue to be based on existing currencies, with digital currencies playing important niche roles. Given Bitcoin’s current problems, it’s not clear whether it will be one of the surviving digital currencies. But regardless of Bitcoin’s fate, its cryptographic advances, distributed architecture and other key technologies will play major roles in the development of a digital money ecosystem for the Internet era.
Irving Wladawsky-Berger spent 37 years at IBM, where his primary focus was on innovation and technical strategy. He led a number of IBM’s companywide initiatives including the Internet and e-business, supercomputing and Linux. In March 2008, Wladawsky-Berger joined Citi as Strategic Advisor, working on innovation and technology initiatives including the transition to mobile digital money and payments. He is Visiting Lecturer at M.I.T., Adjunct Professor at Imperial College, and Executive-in-Residence at NYU’s Center for Urban Science and Progress. In April 2012 he became a regular contributor to the Wall Street Journal’s CIO Journal.
 BBC, “A History of the World in 100 Objects,” at http://www.bbc.co.uk/ahistoryoftheworld.
 James Manyika, Michael Chui et al., McKinsey Global Institute, “Disruptive Technologies: Advances that Will Transform Life, Business and the Global Economy,” May 2013, at http://www.mckinsey.com/insights/business_technology/disruptive_technologies?cid=disruptive_tech-eml-alt-mip-mck-oth-1305.
 World Economy Forum, “Personal Data: The Emergence of a New Asset Class,” January 2011, available at http://www3.weforum.org/docs/WEF_ITTC_PersonalDataNewAsset_Report_2011.pdf.
 Thomas A. Bass, “The Future of Money,” Wired, October 1996, at http://www.wired.com/wired/archive/4.10/wriston.html.
 “Reform by Numbers,” The Economist, January 14, 2012, available at http://www.economist.com/node/21542814.
 Marc Andreessen, “Why Bitcoin Matters,” The New York Times, January 21, 2014, available at http://nyti.ms/1cQPoqa.
 Glenn Fleishman, “On the Matter of Why Bitcoin Matters,” The Magazine on Medium, available at https://medium.com/the-magazine/23e551c67a6.
 “Bitcoin under Pressure,” The Economist, November 27, 2013, available at http://www.economist.com/news/technology-quarterly/21590766-virtual-currency-it-mathematically-elegant-increasingly-popular-and-highly.
 Karen Webster, “Looking Ahead at the Close of 2013,” Pymnts.com, available at http://www.pymnts.com/briefing-room/consumer-engagement/Loyalty/2013/looking-ahead-at-the-close-of-2013.
 Joe Weisenthal, “Robert Shiller: Bitcoin is an Amazing Example of a Bubble,” January 24, 2014, available at http://www.businessinsider.com/robert-shiller-bitcoin-2014-1.
 Paul Krugman, “Bitcoin is Evil,” The New York Times, December 28, 2013, available at http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/?_php=true&_type=blogs&_r=0.
 Charlie Stross, “Why I Want Bitcoin to Die in a Fire,” Charlie’s Diary, December 28, 2013, available at http://www.antipope.org/charlie/blog-static/2013/12/why-i-want-bitcoin-to-die-in-a.html.
 Peter J. Hernning, “More Bitcoin Regulation Is Inevitable,” The New York Times, February 3, 2014, available at http://dealbook.nytimes.com/2014/02/03/more-bitcoin-regulation-is-inevitable/?_php=true&_type=blogs&_php=true&_type=blogs&ref=business&_r=1.