Money of the Future

Trust Issues
Know Your Customer
Out of the Mattresses
Throwing Down the Gauntlet
New York, Maine, and Montana

As I work on my book about the future, I think a lot about the ways possible events will affect our money. But I’m also thinking about something else: What kind of money will we use?

The answer might seem obvious: dollars, euros, yen, all the government-issued fiat currencies that are the economic water in which we swim. Most of us have never known anything else. Yet these currencies aren’t natural phenomena. People created them. People can also abandon them for something else, just as they abandoned older currencies.

I can hear the chorus now: Fiat currencies come and go, but gold is forever. And now there is a drumbeat for Bitcoin. Well, yes, but it’s tough to buy groceries with gold or Bitcoin.

There are good reasons to think we could once again see some fiat currencies disappear. If so, what “something else” will be money in the future? Five years ago, I said that I expected to see a commodity-backed cryptocurrency to eventually emerge and potentially become the currency of the future. Several actually have, too, but without getting much traction for a variety of mostly good reasons.

Facebook’s recently announced Libra project may be the proverbial better mousetrap. On the surface, it seems to address some of the problems encountered by similar offerings. But at this point, it’s really just an idea, and I am not convinced it is ready for primetime. There are a lot of drawbacks, and we will go into some of them.

As you’ll see, Libra may find a place in the new money system, but not without a long fight. Powerful forces have different ideas.

But the point of this letter is not to either praise nor bury Libra, but to think about the future and mechanics of economic transactions.

I can go almost anywhere in the world and use my own form of electronic money: credit cards. Many people are using their phones and in some stores, you simply walk in, pick up the items you want, and leave. The store recognizes your face and bills your account. Yes, you need currency to pay that account. But that transaction happens “behind the curtain.”

Which is what makes Libra interesting and worth discussing. Libra, or something like it, has the potential to reduce the friction behind the curtain. Economic friction is everything that keeps markets from working according to the textbook model of perfect competition: Distance, restrictive regulations, imperfect information. Visible or not, these generate additional costs for consumers.

Some of us of a certain age remember traveling to Europe and paying 10% or more for simply changing dollars into pounds or francs or lira. The “Mama’s” in Kinshasa (back when it was Zaire) would sit in certain areas of the city with currencies in a fold-up device, willing to exchange dollars, pounds, francs, Swiss francs, and others for local currency. That was your international exchange system, and there was lots of friction. Fortunately, I had dollars which were better than any of the local currencies.

The great promise of blockchain technology is its potential to greatly reduce friction of not just currency exchanges but all sorts of transactions. There are literally hundreds (if not thousands) of entrepreneurial businesses trying to apply blockchain to various industries. And it is starting to happen.