[Preamble: this is a talk that I gave recently on decentralization and money. It’s a long read – about 25 minutes – but I’ve had quite a few requests to share it as a blog post. Essentially, you’re going to get three normal posts in one: the first is a RA-style history of money and banking (ie. I skipped the boring bits); the second is about a really influential decentralization in history – the Protestant Reformation – and whether it was successful; and the last is more hypothetical – where I speculate about what the Reformation experience suggests about the future of central banks, and how decentralization will affect them. Obviously, I think this is all fascinating, because I’m a money-nerd. But I hope you find it interesting (and worthwhile!) as well.]
Introduction: cryptocurrency in 2018
Four months ago, at the time that I gave the title of this talk to the organisers, I also handed them a disclaimer. And that disclaimer read: “Please note that I may have to change the topic, in case it’s no longer relevant by the time I give it.”
And since then, we’ve had a year of declining cryptocurrency prices, and rumours of regulatory crackdowns. After 2017’s bubble, the world of Bitcoin has been seen an influx of real money, and it is now being influenced by the pragmatism of Wall Street. Some are calling for the institutionalization of Bitcoin. And many new cryptocurrencies, far from being the opposite of fiat money, are tied to it. For example, just a few weeks ago, the Goldman Sachs-backed crypto-finance company Circle issued USD Coin, a stablecoin pegged to the US dollar.
Also, after last year’s flurry of ICOs, almost every crypto-related podcast that I listen to no longer seems concerned by the prospect of regulation – instead, they are ready to welcome it.
So while the initial idealism of cryptocurrency may have been to build a future that was not as influenced by Big Politics –today, the more established part of that community is preparing to partner with it.
And this should have been expected. In fact, it was. Many market commentators have been saying for years that the idealism would eventually give way, in order for cryptocurrency to function in the real world.
What comes next?
But distributed ledger technology, or the “Blockchain”, still holds a lot of promise. In much the same way that the early pioneers of the Internet could not have imagined the coming world of Uber, Facebook and the smartphone – I think that we have no real way of conceiving of how distributed networks will change the way that we communicate, interact, trade and live.
Fortunately, this means that the conversation around decentralization has never been so relevant. And whether money is the object of decentralization, or simply another example of decentralization in practice, it’s important that we start to place the decentralization narrative within its larger historical context. And perhaps heed some of the historical warnings.
Now you might be wondering why I felt that I had any right to talk about either money or decentralization in the first place.
And the answer to both those questions is: I am a Zimbabwean.
Zimbabwe and Its Money
As I am sure some of the people in this room will already know: Zimbabwe has been at the forefront of monetary experimentation for the last two decades.
We have been through hyperinflation and dollarization. We have become cashless. Through the use of mobile money, we have outsourced 83% of our daily transactions by volume to a private sector company, Econet Wireless. We have had a single-currency regime and a multi-currency basket. Immediately prior to the elections in July this year, the market traded in electronic bank money, bond notes, nostro balances, physical US dollar cash, offshore transfers, the physical and electronic variations of both Rands and Euros – each with their own exchange rate between themselves. We also had a cryptocurrency exchange, where you could buy the most expensive Bitcoins on the planet. Even goats made a brief appearance as government-suggested medium of exchange for the payment of school fees.
Make no mistake – your average Zimbabwean on the street is a financial sophisticate. As I stand here today, Zimbabwe’s economy operates in more forms of money than any other.
And it is in this kind of economic extremis where the philosophy of money is put to the test.
We put cryptocurrency to the test.
And it failed.
Zimbabwe and Bitcoin
Despite all the Forbes and Quartz articles, and the Crypto Twitterati, claiming that Zimbabwe was adopting bitcoin to counteract our failing currency system – we did not. It never achieved widespread usage. It didn’t even really achieve narrow usage.
In spite of the fact that we were using almost every other version of money known to Man.
Now you might think that this was because the technology was not quite there yet.
Only, at the time that US dollar cash disappeared from the market, you should know that it was the primary form of settlement for consumer-related transactions. Most people did not have bank cards. The mobile money infrastructure was established but nowhere near broad acceptance. The market’s need to fill the gap created by the cash shortages literally forced the adoption of those new technologies. So, if the market was so desperate for alternative modes of payment, why did it not turn to cryptocurrency? We had bitcoin exchanges – but that was where it ended.
The Premise of Cryptocurrency
And let me remind you that the premise of cryptocurrency is to provide an alternative to centralized money printing – so the test case should have been obvious. The Reserve Bank of Zimbabwe was printing electronic bank balances through the issue of treasury bills.
But Zimbabwe, a country that has lived through the crucible of hyperinflation once before, and is in monetary crisis once again, has seemingly shrugged its shoulders at Bitcoin, and used virtually everything else.
It is a situation that the crypto-evangelists need to explain. Because it calls into question the entire premise of cryptocurrency. And since it would be very disappointing if I only asked a question and didn’t attempt some form of an answer, I am going to spend the next 20 minutes or so attempting an explanation.
This brings me almost to the end of my introduction. But if the age-old instruction about speeches says “Start by telling them what you’re going to tell them”, then I have not quite done that yet. So, let me pause here to say that this talk is coming at you in three sections. In the first, I’m going to give you a quick and paraphrased narrative of the evolution of money. In the second, I’ll discuss decentralization as an idea in and of itself. And at the end, in part 3, you’ll find out if I can pull everything together into an ending.
PART 1: THE EVOLUTION OF MONEY
I have to start this section with one more disclaimer: I am relating a narrative here, not an academic account. The true story of money is long and complicated, with millenia-long processes that are nowhere near as neat as the story that I’m about to tell. But the principles in it are quite well established – and in the modern conversation about decentralized currency, it seems that it’s the principles that matter the most.
I am now done with disclaimers.
So let me now ask a more philosophical question:
What is money?
If you go and ask Google that question, you’ll get a definition of money that involves it being a store of value, a medium of exchange, and a unit of account.
But that economic definition is not very satisfying. Firstly, it’s more interested in telling you what money is not– in that if one of those three conditions is not met, then it’s not money. And secondly, because that definition is old, and probably due for a revision in light of how the nature of money has changed.
To find a more existential understanding of money, we have to go further back. Back to childhood, and what it means to be part of a family.
For most children, their parents don’t charge them for providing parenting services, board and lodging. Likewise, children don’t charge their parents for laying the table and then helping to clear it. Aunts and uncles and grandparents – no one get handed a bill when they visit.
This communitarian style of living is not built on impersonal economic transactions. Instead, it’s built on something that we might describe as “social credit”. Friends take turns hosting each other for dinner. Birthday presents are reciprocated. Children are raised, and then it’s their turn to take care of their parents. Social conventions, manners and morals all play a role to ‘supervise’ this reciprocation.
And in the same way that our families operate today, the early communities of history did not seem to need money to lubricate their interactions. Instead, their communal obligations created something of a ‘gift-giving’ economy. Which is really just a system of social credit.
But then, these communities started to trade.
Which created a problem.
Because how do you take this complex system of social credit, with lots of IOUs and UOIs, built on deep communal ties, and extrapolate it to cater for a situation where those communal ties no longer exist?
In other words, how do you create trust when the prerequisite conditions for it are no longer available?
This problem demanded a technological solution.
And instead of finding a way to artificially manufacture trust, we instead found ways to live without it.
At first, those early merchants probably bartered directly – because if no one gives anything up without receiving something in return, then you don’t need trust.
But this is a time-consuming and extremely inefficient way of trading. Especially because it requires a mutual coincidence of wants.
So quite quickly I imagine, this early version of ‘trustless’ technology improved itself – and in the next iteration, mutual trade began to rely on commonly-traded and generally-valuable items. Perhaps items that had real value-in-use, like staple foods. Foods like dried fish, or sheaves of wheat – the original commodity-based currencies.
With these commonly-demanded commodities, trade was liberated. Because who needs trust when you can barter?
But soon, the liberation of trade began to demand even better versions of money – because as trade expanded, traders began to encounter two basic problems:
- One, it’s not efficient to wander around with bulky perishables – you need something that’s both easier to carry and easier to store; and
- Two, using items like wheat and dried fish can make it difficult to establish consistent pricing, because your pricing is going to vary with the weather. During the harvest or the fishing season, ‘money’ is suddenly cheap and plentiful. Outside of those times, money is expensive and scarce, because people are physically eating the money supply.
What was needed was something that didn’t have seasonal supply, was relatively easy to carry, but was still generally desirable.
And the more scarce, the more valuable, the better. Because you wouldn’t need to carry so much of it.
And so, we see those early traders beginning to transact with gold, silver, iron and copper. Precious, valuable and scarce commodities.
Which, of course, re-liberates trade. Because now it’s even easier to get around, and your profits are less likely to rot on you.
And then: coinage
On the back of this new ability to trade over long distances, empires were born. With them came the institutionalization of money: the minting of coins.
Coinage is the version of money with the longest track record. But even it did not solve the problem of trust. Traders did not trust each other like family members could – that’s why money existed in the first place.
And even money could not always be trusted – it could be debased. Many civilisations dealt with this problem by enforcing harsh penalties against currency debasers, and by creating legal tenders that were stamped and certified by the ruler’s treasury.
Of course, rulers were often the greatest perpetrators of currency debasement – some even trace the fall of Rome back to the Emperor Diocletian, and his steady dilution of the gold content in his coins.
But money was not the technology that solved the problem of trust. Money allowed you to be trustless, not more trusting.
So what technology did solve for trust?
Ironically enough, it was banking.
Banking and Trust
For merchants, carrying coinage around was something of a security hazard. It could go down with the ship – or it could be stolen.
But avoiding that security risk gets you back to this issue of trust. How do you trade with someone without having to hand them the cash there and then?
Enter: the Knights Templar, and their banks, and letters of credit.
In some ways, banking as ‘technology’ is quite a simple solution. The question of trust is outsourced to a trusted third party. The bank holds the coinage of Merchant A and gives him a bill of rights to that coinage. Merchant B knows and trusts the bank’s bill of rights, so is prepared to accept them from Merchant A instead of actual coinage.
We may not trust each other, but we both trust a mutually-known third party.
And now you had merchants travelling with pieces of paper instead of bags of metal. Trading just substantially de-risked – and then it extended itself across oceans.
Standards of Commodity-Based Money
As trade expanded across the world, global form of money started to emerge, and gold and silver began to assert themselves as the primary standards of money.
But by this point in time, money in practice is also one step removed from the actual metal, which is sitting in a vault somewhere. Money is now a paper declaration of a right to that commodity.
Banking ex nihilo
It also didn’t take long for banks – these ‘trusted’ institutions – to take their role as trust arbitrators further than simply being depositaries for gold and silver.
Borrowers would arrive at the door, the bankers would assess credit risk and viability, and credit would be extended. That is: the banks began to lend. And then, at scale.
What you might also note here is that this is money creation ex nihilo. Money creation out of nothing. The banker assesses a borrower’s credit risk, and if the borrower is deemed to be creditworthy, he hands him a letter of credit.
Debit a loan asset, credit the borrower’s deposit account.
This is not fractional reserve banking – which is a nice theory for Youtube clips but is not really how banking works in practice. Rather, this is the bank acting as a trusted institution, brokering trust.
At this point, what you should also notice is that money is now two steps removed from the gold and silver sitting in the bank’s vault. In the bank’s ledgers, the list of deposits on one side is backed by two things: physical gold in the bank’s vaults, and a series of loans that the banker has made to borrowers that it deems trustworthy.
The Rise of The Modern Financial System
As the modern financial system arose, built on credit and trust, the physical, valuable commodity in the bank vault receded in importance. Society still clung to this vestige of a trustless world, redesigning and reimplementing gold and silver and bimetallic standards. But it was credit that propelled us through the Industrial Revolution and into the age of the first truly globalized trade union, the Imperial British Empire, upon which the sun never set.
Technologically speaking, in this story of the evolution of money, we are about to come full circle.
In 1971, when Nixon severed the link between the US dollar and gold, the world was forced to embrace what had already been a truth for some time. Money was no longer needed to defend against trustlessness.
We had built a modern Capitalist system of formalized credit, which represented an analogous form of trust between economic agents.
And here we are: full circle.
Fiat Money and Trust
The story of money begins with a community of people. Those community members trusted each other to fulfil their obligations in a system of social credit, governed by social contracts of morality.
Where the bonds of social contract were weak, traders invented money to deal with the lack of trust.
But with the modern banking system, we don’t have to trust each other – we just have to agree to mutually trust the banking system. The banks do the credit risk assessments and fulfil FICA requirements. They intermediate between borrowers and depositors, between those that can contribute now, and those that can contribute later. And they are not especially limited – they can look at your credit risk, and acting on society’s behalf, spontaneously monetise your value potential into your bank account. The banking system gives us a macroeconomic approximation of a global community, where IOUs and UOIs are what really matters, not some underlying precious commodity or scarce resource.
Whatever its flaws, I think it is impossible to be unimpressed with the scale of this solution. And let me emphasise that I say that as someone who has personally experienced what happens when the worst fears about fiat money are realized.
But if we have spent the last half century living with unbacked currency, living in trust rather than without it, then what is the modern role of money?
Money as Measurement
Well, I would argue that its main function is as a form of measurement. It’s how we articulate what is sitting on the ledgers of banks; how we price our goods and services; and how we describe the transfers of economic value between ourselves.
Money is no longer constrained by the shackles of a single commodity – it is now backed by nothing, but backed by everything. After all, if you really want your money to be backed by gold, you can just go and buy some gold with it.
Our problem today is not with money itself. The bigger problem is: what happens when our outsourced institutions of trust break that trust? As the big banks did when they engaged in the reckless lending practices that led to the financial crisis of 2008.
One potential answer is to revert back to trustlessness.
The white paper for Bitcoin was issued as a response to the financial crisis. And what Satoshi Nakamoto designed was a decentralized version of money – money that was not issued by a central bank, money with a fixed supply, money that was almost unbreakable thanks to the distributed ledger network that underpinned it.
In short, he re-designed a trustless monetary system: one that could operate without having to trust anyone.
But that is an odd anticlimax to this story about money.
Because for the most part, we already have a fairly good solution to the technological problem of trust. In some ways, we no longer need money to the same extent that we used to.
Which is not to say that trustless money does not have its place.
Money as backstop
To go back to the Zimbabwean situation – what has happened, twice, is that the Zimbabwean banking sector has been derailed by an overspending fiscal authority. And each time that banking system was broken, Zimbabweans reverted to using more trustworthy mediums of exchange, units of account and stores of value.
Instead of using their own electronic money in their bank accounts, they began to use cash from other banking systems. Price was redefined in terms of the American Dollar and the South African Rand. Zimbabweans preserved their purchasing power by buying shares, property and groceries, and by holding foreign currency in offshore bank accounts.
So indeed, they found trustless alternatives – and it’s entirely possible that decentralized currencies will one day have a place in that mix. But they also found more trustworthy alternatives. That is: Zimbabweans started using other fiat currencies.
“Setting the monetary system back 300 years”
That suggests that responding to banking failures by trying to absolve the economy from trust in human institutions, by seeking to circumvent the banking system, and the role of banks as brokers of trust between borrowers and the rest of society – is the backward step that Paul Krugman is talking about when he says that “cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years.”
It is quite possible to argue that we are too far gone down this path of trustfulness to rewind back 300 years. Our economies are built on communal networks of trust-based credit. Until we find a decentralized solution for trust in human institutions, cryptocurrency is more likely to end up as the Napster of the monetary system, rather than its Spotify.
Digital Money and Digital Assets
I say that because both Napster and Spotify are built on the basis of digital music assets. Napster helped shift the consumption of music away from physical CDs and tapes, and toward a digital alternative. But the communal file sharing of music from the early days of the internet has given way to Apple Music and Spotify: centralized institutions that share the music with us, for a monthly subscription fee.
Which is why we should talk about decentralization. Because just like Napster changed the world of commercial music, cryptocurrency and distributed ledgers will surely change the future of money in general.
Which brings me to the second part of this speech.
PART 2: THE PROTESTANT DECENTRALIZATION
Now I don’t know whether this will be good news or bad news – but you’re about to get another story. Because the blockchain and Bitcoin are not our first decentralization rodeo – and so a bit of history here might be helpful.
In the list of history’s decentralizations, perhaps the example with the most relevance for what we are experiencing today is the Protestant Reformation.
If you ever visit the International Museum of the Reformation in Geneva, as you walk into the very first room of the permanent exhibition, you will see glass cases in front of you and to your right. Those cases are filled with multiple translations of the Bible. And on the left of the room, is a printing press.
And if I can paraphrase the message of that room to match today’s topic: it’s clear that the cornerstone of the Protestant Reformation was the decentralization of the gospel.
In order to illustrate the significance of this process, let me give you a bit of Church history.
The Institutionalisation of Christianity
Up to that time, the Bible had always existed within the Tradition of the Church. Early Christianity had developed from an oral tradition of Christ’s teachings, taught first by Apostles, and then by the successor-bishops that they appointed. Out of that oral tradition flowed a series of written texts, which were codified into the Bible as we know it today by the Church Fathers at the Councils of Nicaea in the 4th Century. That codification coincided with the institutionalization of Christianity as the recognized religion of the Roman Empire under Constantine.
The Church, as an institution, developed as a brotherhood of bishops, each acting as Father to their respective communities, appointing representative priests and deacons to pass on to the laity the collective teaching of Christianity that the bishop, as leader, preserved through his communion with his brother bishops. There was a clear, centralized hierarchy. The Bishop is the Teacher, who teaches the clergy that report to him, who in turn pass that teaching on to their congregations.
And for most of church history, this made practical sense. The faithful were illiterate – they had to be taught.
The Centralisation of the Papacy
As the centuries passed, the trend of centralization in the Western part of the Church began to coalesce around the Bishopric of Rome. And with the collapse of the Byzantine Empire in Western Europe, political power in the West centralized in Rome as well.
Which was problematic. Because when secular power focuses itself in religious institutions, you get the kind of religious rulers that are more interested in their secular power than in the sanctity of their institution.
As you know if you’ve ever read or watched anything to do with the Borgias, this led to egregious abuses of trust. Here was this centralized institution in the Church, who the people of Western Europe trusted to broker the ultimate value of all – eternity, being corrupted from the top.
The Printing Press
Then, in 1450, there is the invention of the printing press – the technology that would allow the Reformers to break down the walls of papal hegemony.
In 1517, Martin Luther pens his 95 theses. And then he prints them.
Five years later, he publishes his translation of the Bible out of Latin into vernacular German. William Tyndale follows Luther’s lead by translating the Bible into English, and copies of it are smuggled into Catholic England.
The Reformers print everything, en masse, and distribute it directly to the people of Europe.
And the newly Protestant Princes of Europe embark on mass programs of literacy in order to support their new beliefs.
Sola Scriptura and the Decentralization of Christianity
The core new doctrine of Protestant Christianity was Sola Scriptura. That is: ordinary men and woman no longer needed the clergy of the Church to arbitrate religion for them – they could read the Word of God themselves, access Divine Inspiration directly, and seek their salvation without the intermediation of a priest or bishop.
In every important way, the Protestant Reformation was its own kind of distributed network. The network itself was powered by mass literacy; the blocks were articles of faith; and the hash was general consensus based on interpretations of biblical text.
This was the decentralization of Christianity. And for participants in this network, it was the decentralization of real eternal value, not just economic value.
But you have to wonder if Martin Luther, John Calvin and the other authors of the Reformation would be happy with the changes that they launched into motion. Their early idealism – to return to a truer and less corrupt version of the Faith that they were persecuted for – launched something that they did not necessarily intend.
The Fork in Consensus
When you decentralize doctrine, you have to accept the risks of hard forks in consensus. And that distributed ledger of the Reformation hard-forked to give us the Enlightenment. The consensus shifted away from interpretations of Biblical text toward rational interpretations of human thought. The blocks became articles of constitution and governance, of human rights and science.
In some ways, it is not surprising that the country that began with the arrival of Protestant refugees on the Mayflower should have become the World Leader in the protection of individual freedoms, of democracy, free markets, and deregulation.
But it is not just America. Most of us are grandchildren of the Reformation, and children of the Enlightenment – we have inherited that core belief that we should be free to do as we wish, within the mutually-agreed bounds of the laws that we are inspired to create.
And we have built the modern world on democracy as consensus: the myth of a distributed ledger of individual votes, unstoppable and immutable.
But the path to this point was not easy.
Did Decentralization Work?
What began as a protest against a corrupt and centralized Church hierarchy turned into centuries of persecutions and revolutions. And if the intention was to overturn the papacy, then I think we can safely say that the Reformation failed. The Catholic Church launched the counter-Reformation in response, and today, the Pope of Rome oversees 1.3 billion Catholics – almost a fifth of the world’s 7 billion people. He is the head of state with the largest sphere of influence.
And the technology of the Reformation: the printing press, literacy, and democratic access to religious writings, were the same tools that Catholicism used to reassert itself as the most powerful religious institution in the world. The decentralization was co-opted into greater centralization.
The papacy was changed, and its secular power eroded down to the 44 hectare plot of the Vatican. But its spiritual real estate has never been so vast.
So what is the lesson from history?
The risk of decentralizations is that they unleash change, and the tools to create it. But then the early decentralisers lose control of their original ideals to the momentum that the decentralization process itself creates. And the original centralized target takes the network, and harnesses its applications to re-inforce the base of their own establishment.
And we should probably expect this. That seems to be the logical conclusion of these two forces. Decentralization is a process of consensus, where centralization is a coalition of power. Consensus is always a trend in motion, where power has the inbuilt tendency toward securing its own stability.
And this brings me to the final part of this speech. Which is this question: “What will the decentralized distributed ledger of cryptocurrency do for the future of our centralized banking institutions?”
PART 3: DECENTRALIZATION AND THE FUTURE OF CENTRAL BANKS (and money)
If we’re to follow the historic pattern, we can expect to see Central Banks take this technology and harness it to secure the future of the banking system.
Think beyond the question of money printing, and limited supply, and revoking that power from Central Banks.
Consider that the task of Central Banks is to oversee monetary policy. Current monetary policy is built on theoretical models.
In other words, up to this point, monetary policy has been based on assumptions. And those assumptions might be tested – but only ever tested on imperfect sets of data. The commercial banks are private institutions. Their transactional data sits in databases. Those databases do not speak to each other very well. And not all transactions flow through the banking system.
But imagine a world with some evolved variation of a centrally-issued cryptocurrency: where every transaction is not only a matter of record, but each ordered with a standardized description of buyer, seller and purpose.
If central banks co-opt distributed ledgers into their monetary structures, future monetary policy could be built on progressively more perfect data sets.
Cryptocurrency may have been an attempt to break the institutional strongholds of national Central Banks – but the underlying process of digitizing money, and even distributed ledger technology itself, may well turn out to be the tools that Central Banks use to make their monetary authority more absolute.
And extend this beyond the banking system to the greater structures of governance. If we create permanent public records of all our data, linked to intrinsic identifiers, then who stands to make the most from using it? To what extent will those in political power be able to resist the temptation to re-inforce their positions with buttresses of our own predictable patterns of behavior?
That question is mostly rhetorical. We’re not very good at resisting temptation.
But is there a triumph here?
That thought may seem like a gloomy and pessimistic way to end this. By concluding that the destiny of decentralization is to re-inforce centralization. That the great decentralizing force of the Reformation created the conditions for a stronger papacy. That the potential freedoms of the internet in the early 90s would lead to Facebook, Google and Amazon – tech companies ruled by dictator-type CEOs with more authority, however subtly wielded, than any ancient emperor.
But you might equally tell this story as the great triumph of decentralization. That the decentralizing force of religious self-determination created a secular world built on humanist principles. That at the heart of every centralized authority is the seed of its own decentralizing reformation. And these forces of reform and counter-reform, of centralization and decentralization, are simply counterweights in the pendulum.
Which is more realistic, I think. But then given that, the question remains:
What does the future of money look like?
Paradoxically, it is quite likely that money will become both more centralized and more decentralized.
More centralised, because the banking system will undoubtedly find ways to employ cryptocurrency-inspired ideas to reinforce the dominance of fiat money. Which may not necessarily be to our disadvantage – after all, the bankers have not done all that terribly by us. 2008 was unfortunate, but having access to a credit card, and being able to use it anywhere in the world, and living in an industrialised age – that doesn’t sound like the worst possible outcome.
But money will also be more decentralized. As it has in the Zimbabwean economy, which uses more forms of money than anywhere else. Even though it is arguably in everyone’s interest to have a functioning banking system, with a trustworthy central bank, that uses fiat money – when that system fails, we choose fiat currencies from other central banks, we use mobile money, we buy assets, and the market starts to use multiple forms of money. Which is really a form of decentralization – the dissolution of monetary authority between alternatives.
So if cryptocurrency wants to step into a market that is already stocked with foreign currencies, mobile money, financial assets, precious metals, collectibles and gift vouchers – then welcome to the monetary party.
The Zimbabwe Experience and Monetary Pluralism
To come back to where I started, my guess is that it is the existence of monetary alternatives that explains why crypto did not rise to become the dominant form of money in Zimbabwe’s economy over the last two years.
Cryptocurrency seeks to overturn a monetary system that is, in many ways, already overturned. Even outside of Zimbabwe, people use more than one form of money on a regular basis:
- For stores of value, there are shares, index-traded funds, collectibles, real estate, and a wide range of other asset classes to choose from.
- For units of account, I can price things in dollars, in Rands, or in almost any other freely-traded fiat currency in the world – depending on how much I like that currency’s central bank, ruling party, and the economic prospects of its home country.
- And for mediums of exchange, I can use my bank card, or cash, or that gift card that I purchased with my eBucks, or the balance in my iTunes account.
The thing is: we don’t really live in a world of fiat money.
Instead, we live in a world of monetary pluralism, where certain forms of money work better than others, for certain purposes.
Cryptocurrency is just another option.
And for now, in practice, in Zimbabwe at least, crypto does not really hold its own against every other kind of money that you can use instead.
But that day is probably coming.
With all the costs that may end up accompanying it.