The Money Lab: Will Law Preserve Fiat Money from extinction or usher in new and futuristic alternatives?

What is money? where does it come from? and how is it made? There are no straightforward answers to these questions. This is strange considering that  money ‘makes the world go round’ and is often attributed as the core of any capitalist market economy where mere fluctuations in its value can cause an unprecedented violence on society.

Disregarding the overly complex theoretical arguments often made by  scholars, money is generally perceived in terms of the functions it performs i.e. as a medium of exchange, store of value and a unit of account. Such functional and utilitarian approach to its definition restrict the conceptual investigation exercise to a set of identifiable functions thus simplifying the task and enabling society to definitively identify what counts as money. More so because history is replete with examples of various forms of ‘money’ such as precious metals exchangeable for value at some point in history. The functional definition is, therefore, a useful tool in weaving out the essential characteristics of what should be classed as money.

Some historians allude that the earliest forms trade transactions were conducted through a barter market system where goods and items were exchanged directly. These modes of concluding transactions, however, became inconvenient to facilitate long distance trading. The impracticality of the barter market system led to the recognition of certain valuable commodities such as gold, silver, seashells and other precious metals. It is argued that these commodities, being the earliest form of money, provided merchants  with sufficient means to measure, store and exchange value in goods or services.

New monetary theories have today come a long way from the historical arguments that associated money with commodities and barter. The physical form of whatever counts as money in today’s world, in addition to clear-cut functions, is associated with seigniorage, a fiat system where money is issued under the authority of a sovereign.  As such, money is easily associated with banknotes and coins as sanctioned by a country as the generally accepted medium of exchange backed by the country’s full faith and credit.

Human society has recorded tremendous changes over the past centuries and this evolution is not stopping. As a result, no one can credibly predict what will be exchanged as money in the future. Interestingly, some experts and economists predict that  fiat money i.e. printed notes and coins will become completely extinct in the next couple of years. The fourth Star Trek movie, The Voyage Home, mirrored the point when the crew of the starship travelled back into time from the 23rd century. Shortly after arriving, the leader, Admiral James Kirk, remarked: “they still use money? we’ve got to find some.” Though we may never see a day when fiat money will be completely extinct, there is credible indication that technological innovations and tools will redefine how we exchange value for goods and services.

Proof of that fact is not far-fetched. In recent years, the global economy has begun drifting towards ‘cashlessness’ with high volumes of trades mostly conducted electronically. Surveys in the UK reveal that retail transactions conducted electronically account for 80% of all retail sales. It was even predicted that by March 2015 “notes and coins will be overtaken by cashless payments”  in the UK with the value of such cashless payments superseding physical currency payments but allowing for only a small fraction of cash payments transacted for small items such as coffee. Bank of England research also shows that fiat currency is only a small fraction of the entire money within the UK economy with electronically recorded bank deposits and reserves accounting for a much larger chunk.  Perhaps this demonstrates that fiat money is tinkering on the brink of extinction.

Most economic pundits and experts opine that electronic forms of money and crypto-currencies such as Bitcoin and Blockchain will replace hard cash and it is not hard to see why. The financial services industry is beginning to pay close attention to cutting-edge innovations in crypto-currencies. For instance, the Financial Times recently reported that four of the world’s biggest banks have teamed up to develop a new form of digital cash that they believe will become an industry standard to clear and settle financial trades over Blockchain, the technology underpinning bitcoin.

Electronic commerce is undoubtedly reducing society’s reliance on cash by making it possible to purchase goods and services electronically and anywhere in the world thereby strengthening newer and innovative electronic payment methods. With the steady incursion of technology into daily payment habits, it comes as no surprise when economic policy makers and financial institutions propose a re-think of the traditional concept of money, its use, form, and significance. Additionally, the mishaps of the 2008/2010 financial crisis is causing erstwhile profitable businesses to find more profitable business models for the future, hence the industry jostling. Although it is almost unnoticeable, governments are beginning to pay attention and propose steps possibly leading to a revolution in monetary frameworks. For instance, it was recently reported that Denmark  banned the use of cash within specified sectors of her economy while the Bank of England’s Chief Economist Andy Haldane also publicly proposed that Britain abolish her centuries-old system of cash and opt for a government-backed digital currency.

These electronic alternatives to money drive innovation and provide remarkable solutions to day-to-day market challenges. In Europe, asides facilitating the single market system where large volumes of B2B, B2C, and C2C trade can be conducted across national borders, technological advances in payment systems open up new vistas of possibilities, both positive and negative. For example, such innovative payment solutions make it possible for a risk-averse consumer to pay and purchase intellectual property without due authorization from any corner of the world; and enables institutional entrepreneurs and consumers engage in underground criminal trading in drugs, lethal weapons and contraband items through the ‘dark web’.

Laden with positives and negatives, the deployment of electronic alternatives to traditional currency pose serious challenges to monetary policies and global security. More specifically, such deployment would pose significant threats to the global monetary system and undermine the power of central banks to exclusively regulate and formulate monetary policies. Fortunately or unfortunately, the possible success of disruptive financial technologies such as Blockchain largely depend on how governments choose to regulate and whether Central Banks promote alternative forms of currency which take away their relevance as financial settlers. To forestall such threats while stimulating the continuous development of emerging FinTech, deliberate government intervention through regulatory controls must be put in place.

Appropriately tailored regulatory control will create a coherent market system which allows FinTechs to functional with less friction with traditional methods and systems. Failure to promptly set up proper legal controls will invariably lead to market uncertainty and cripple the potentials of innovative ideas.

Kingsley Udofa.

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