Ght in salt’ – Wayne Pisani
providers and online banks.
The money available through a debit or credit card is nothing more than dematerialised fiat money loaded onto a magnetic or chip card, or stored in an electronic wallet: a digital representation of value called ‘electronic money’ – currency that a government has declared to be legal tender.
The aspect which is strange today, Pisani thinks, is that money starts off with being material and then we dematerialise it. “If a central authority or bank were to resolve that more money in circulation ought to be issued, instead of printing bank notes or “Theoretically speaking, it would make sense to have one common denominator as a currency,” said Pisani. Money has three qualities: store of value, which means it is an asset that maintains its value without depreciating; unit of account, which means it has a nominal unit of currency used to represent the real value of any item (eg euro); and medium of exchange, which means it is an intermediary instrument used to facilitate barter.
“If we all agree that we are going to use one unit then, in theory, we do not need different currencies. A supranational body equivalent to the IMF or UN could potentially issue a globally accepted token over a minting coins, it should just be a matter of issuing them in tamperproof digital format which we would trust, exchanging value in digital money units.”
Society is used to relying on a central authority, possibly to have recourse against same. Hence, the scepticism on the use of public blockchain for financial applications to replace money may be driven by such sentiment. “So long as it’s backed by a central authority, we are trusting it,” says Pisani.
He explained that, because banks are not trusting public blockchains, then private blockchain solutions managed by blockchain.
“The reality is that society has evolved in so many directions that having one medium of exchange for all society is difficult; consider the difficulties faced in Europe to transition to the Euro. Hence, whilst theoretically possible, the problematic part of this would be the transitional process to a single accepted value-unit of exchange.”
Pisani insisted that we should not wait for one unit of account that would facilitate exchange of value for the whole world if we want to move closer to a cashless society. The answer lies in facilitating the exchange of value in whichever medium and units it is represented. a pool of trusted entities are being explored: a blockchain implementation by the banking system as a trusted medium.
Asked if he thinks this central authority will remain, Pisani said that “as things stand, it seems so, and as things are evolving, I think that we’re going back to it.”
With bitcoin’s value currently going down by the hour, investors may attribute this to the fact that it is not being backed by a point of trust. However, had it been backed by an asset, then its value would be automatically stabilised by the trust placed in the value of the underlying asset.
Were one to make a comparison – what is happening in the Initial Coin Offering space as well as the ‘value’ of bitcoin and ether is the same as the herd instinct occasionally experienced in capital markets and the stock value of companies listed on the stock exchange. The underlying asset or net asset value of the listed company, coupled with the monitoring in place by the stock exchange listing the respective financial instrument, mitigate the volatility of the trading value.
Within the so called cryptocurrency space, unless backed by a real world asset, for as long as the major economies do not embark on regulating the space, the trading value will continue to suffer high volatility driven by speculation and investor instinct.
Bitcoin’s value rests on nothing but the trust investors place in it, just as the stock value of publiclylisted companies may change depending on how people perceive the company is performing.
A fast evolution
“Unfortunately, it came a little too late because what we’re doing is reverse engineering,” says Pisani.
We are preconditioned by the use of money in material denominations as it has evolved throughout the ages. The instrument acting as a store of value, unit of account and medium of exchange can be backed by any asset carrying some form of value and should not be restricted to minted money. Issuing receipt notes in the form of bank notes for the valuables entrusted with the Medici’s bank was the latest technology in the 14th century.
In the 21st century, we are resorting to distributed ledger technology (blockchain being a type of such technology) to issue digital instruments of payment. The concept is analogous and should follow the same model of directly issuing a digital receipt for the asset, rather than digitising the bank note which was issued as a representation of the value of the asset – as at present, we are receiving valuables, issuing paper and then converting paper to digital money.
Although side-stepping this central authority-controlled system, the bitcoin protocol lacks the very quality of money that ascribes its value. It showcases a technology solution that does not need a central point of trust because of a democratic protocol distributed on a number of ledgers amongst computers (nodes), creating a medium of exchange that is accepted by others.
“The flaw is that it is not backed by an asset, and typically, I want my gram of meat for its weight in salt,” says Pisani.