Article by Scotcoin’s own Temple Melville published in City AM on 28/8/19

Cryptocurrencies are almost as old as money itself. Indeed, crypto simply means concealed or secret. So the first man (or woman) who tried to exchange some rocks for a sheep could be said to have been using a crypto currency. Up to that point a sheep had been worth 15 chickens. It’s simple, really. You attribute a symbolic sense to something you do not see.

Finance Houses and liquidity

Move on to the 1600s when after the Thirty Years War belief in what then passed for “money” was at a low. Something else had to be found, and it was, in the shape of strong finance houses with robust links to other similar houses. They issued their own currencies when the State currencies could no longer be trusted. Move on again to the American experience of the mid 1800s. There were over 8000 “currencies” – usually paper – being traded around the country with a big business in accepting and exchanging them. There had to be some form of currency to enable trade to take place as America expanded. These of course were seriously open to abuse and eventually the individuals and banks that had issued them had to bow to the Federal Government creating its own, reliable currency.

Liquidity created – WIR

In the 1930s there was to all intents and purposes no liquidity in any markets. Things were so bad that some of the good citizens of Zurich created their own currency to enable them to trade. This was called WIR and was, indeed, like those currencies before it, a crypto currency. Over the years it has prospered (perhaps one would expect a Swiss monetary instrument to do this) until today it is used by more than half a million people, over 70,000 businesses and transacts some CHF2.5billion annually – that’s around half a percent of Swiss GDP. By doing so, it illustrates exactly what “Money” is – a trusted medium of exchange that others will accept, and a stable store of value.

Crypto today

The present crop of crypto currencies rely on digital technology to give them credibility. You can’t have a run on the “Bank” for example – there isn’t one. Despite being relatively small in terms of value (only some 0.1% of total world assets) they already show what digital and crypto currencies can do to enhance people’s lives. As an example, if you want to send £1million to anywhere in the world, that will cost you between £20-30,000. Using a digital currency, it can be done for 50p. In fact, the Philippines is looking to create a Bitcoin transfer system for its overseas citizens. Using this system would save their economy over USD1.5 Billion a year – a significant sum in a poor country.

The three cryptos no one talks about

There are three interbank tools that are in effect digital currencies and have been for years. These are:

1. Target2 – the ECB system, the old Bundesbank system which is currently so politically in focus in respect of Italy

2. IMF SDRs – Special Drawing rights

3. The highly secret interbank settlement system at the BIS in Basle.

These three were absolutely crucial in getting the world through the 2007 crisis.

Hyun Song Shin of the BIS argued last year that cryptos (and he was specifically talking about Bitcoin) had issues with scalability and finality. At that time he was right as you would expect, but he was talking about first generation blockchain. We have since had second generation in Hyperledger, and now third generation called Permissioned Decentralised Blockchain. Facebook’s Libra will largely use this system and there can be no doubt this will revolutionise the use of digital and crypto currencies world-wide. We’ve gone from around 35 million wallets to a potential 2.7 BILLION. But Shin’s central thesis holds good – you need people to USE these new currencies to make them both trusted and useful, and having exchanged goods for the currency, the person TAKING the currency needs to find someone else to take it as well.

Cash declining

The use of cash has been declining for years in most western countries, and the Central Banks have realised that it will have to be replaced with something. To this end both Sweden and Uruguay have run full scale crypto trials which have largely been successful, though not set for full implementation anytime soon.

The use of crypto currencies can and should mean social inclusion. Whilst Central Banks’ attitude remains “Bitcoin is not a good idea,” the idea behind it continues to fire imaginations all around the world.

The Brixton Pound

This remains a very positive initiative which is making a real difference within Brixton. Arguably it’s as old as Bitcoin. People are prepared to use it and pass it on – and the money stays in Brixton. That is different from the likes of Bitcoin which is world-wide, but it doesn’t detract from the social inclusiveness of it. We look to history for lessons on the nature of money and the role of central banks in building trust in the use of money in society. The issue of trust has again come to the fore in debates on the durability of cryptocurrencies such as Bitcoin, and how far private money can supplant central bank money as a medium of exchange.

Future payment needs

In the future, physical cash or even bank transfers as we currently know them are unlikely to be the main answer. Central banks are already working on systems and digital currencies that will be trusted and used. Existing crypto-assets have exhibited a high degree of volatility and are considered an immature asset class given the lack of standardisation and constant evolution. They present a number of risks for banks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks. But new know your customer and anti-money laundering rules will mitigate much of this.

In many ways, the African sub-Saharan region has become a leader in mobile money resulting in a radical change in the delivery of financial services and significant gains in financial inclusion. Where there is a lack of payment infrastructure, the use of crypto currencies immediately enhances trade and social inclusion. You only have to think of Eastern Europe which hardly had a fixed line telephone system before 1989, and suddenly every man and his dog had a mobile phone, leapfrogging to a new world.

Christine Lagarde in an excellent speech to the November 2018 Singapore Fintech Conference, has posed the question – should central banks issue a new digital form of money?

Arguably they already have. As such, it can only be seen as a force for good.