Over the last few days, Zimbabwe’s mobile money system, Ecocash, has struggling to stay online. For non-Zimbabweans, it is hard to appreciate the scale of this problem. Zimbabwe’s economy is involuntarily cashless – which means that the primary methods of payment are debit cards, bank transfers, and mobile money. But for a country that is largely unbanked (and has no cash), mobile money is by far the most significant payment method.

I can give you a statistic. In its weekly economic highlights publication for the week ended 22nd June 2018, the Reserve Bank of Zimbabwe reported that just over 40 million transactions were processed through the National Payments System that week. Of these, 33 million were Ecocash payments. To be clear: that’s 82.66% of almost every transaction taking place in the Zimbabwean economy.

And also: when the Ecocash system goes down, 83% of the economy’s transactions just stop happening. That’s a systemic risk to an economy if ever I saw one – all in the hands of a single, private sector player.

Which is, you know, not ideal. It also has people in the rest of the world worried about the potential pitfalls of a cashless society.

But this situation also highlights something that is often forgotten in the anxiety around fiat money and central banks – that money is always a form of technology. And technology has vulnerabilities. And system failures. Ones that are usually quite specific to the form that the technology takes.

Money as Technology

Here’s a timeline of monetary operating systems for you:

Money v1: OS “Social Credit”

In this early iteration of money, the operating system was built on the basis of mutual trust between members of a community. The elders, and social bonds, ensured that trade between community members was fair. And when it was unfair, the community stepped in.

Key features: cashless; bankless; highly effective in domestic settings

Key vulnerabilities: inability to expand beyond the edge of the settlement; the unscrupulous could take advantage of the system by violating trust.

Money v2: OS “Commodity Trade”

This second generation of the monetary OS was released to deal with trade between communities. In transactions that took place beyond the borders of communal enforcement, social credit was easily reneged upon. The solution was to abandon credit, and insist that trade involved a direct exchange of goods.

Key features: cashless; bankless; could transcend domestic economics

Key vulnerabilities: reliant on the mutual coincidence of needs; unwieldy; costly to transport; risks of asymmetric information due to an exponential number of potential exchange rates.

Money v2.1: OS “Commodity-based Monetary Standard”

Within a very short space of time, a bug-fix was released to deal with the shortcomings of multiple commodities. Traders assigned certain types of commodities (like precious metals) as the monetary ‘base’ for their transaction. Thus, clear values could be ascribed to anything – and the idea of ‘price’ as a market mechanism became widespread.

Key features: certain key commodities operated as cash; bankless; trade facilitated through pricing

Key vulnerabilities: security risks as traders had to travel with the key commodity; unwieldy; costly to transport

Money v2.2: OS “Safer Commodity-based Monetary Standard”

To address the security risks of traders moving with large amounts of commodity-based cash, banking-type institutions emerged. They housed the commodities, and allowed traders to operate their trade with bills of rights. This was an early version of paper-based commodity-backed money.

But it did mean that there were greater incentives for robbing the safe-houses of the banking institutions. Also, the growing wealth stored in the vaults of the banking institutions attracted the attention of monarchs and rulers. Why tax when you can just take the money directly from the safe?

Key features: easily-transportable and transferrable cash; vastly more efficient trading possibilities

Key vulnerabilities: security risks centralised to locations where the gold (or other commodity) was kept; risk of fraud; risk of political expropriation

Money v3: OS “Commodity-Credit Monetary Systems”

After being plundered occasionally by unscrupulous rulers, the banking institutions, trading guilds and wealthy classes began to use their political power to limit the power of autocratic monarchs. The banking institutions revived the concept of social credit, in its more modern version as “debt”. The bankers became the new ‘elders’ of a much broader society of people, offering loans at rates of interest, and using the legal system to enforce their collection.

Key features: easily-transportable and transferrable cash; even more efficient trading possibilities – including the option of having trading ventures funded by loan financings

Key vulnerabilities: security risks centralised to locations where the gold (or other commodity) was kept; risk of fraud; risk of debt crises; monetary system now partially backed by entrepreneurial ventures (and not the original commodity)

Money v4: OS “Credit Monetary Systems”

The rise of capitalism, and the expansion of credit that drove it, created an increasingly deeper divide between the monetary system, and the commodity base that theoretically backed it. The banking system had evolved into an intermediary between those with capital (the depositors) and those that needed the capital to fund their business ventures (the creditors). The vestige of a commodity-backed currency regime began to act as an anchor on these new Capitalist economies. This was especially true in the aftermath of debt crises – where the fixed exchange rate between the paper-based currency and the commodity forced internal devaluations through wage cuts and unemployment.

So economies began to experiment with severing the connection between money and commodity. And this came with the risk that money was now freely printable.

Key features: easily-transportable and transferrable cash; still yet more efficient trading possibilities; sophisticated credit markets; a more efficient devaluation adjustment mechanism in the event of debt crises

Key vulnerabilities: hyperinflation; risk of fraud; greater risk of debt crises; monetary system now backed by entrepreneurial ventures and collateralised assets

Money v4.1: OS “Credit Monetary Systems with Inflation-Targeting Central Banks”

The first trials of fiat money (ie. unbacked money) often resulting in high inflation (and sometimes, hyperinflation). In order to prevent politicians from taking advantage of the printing presses (in the same way that monarchs once raided the vaults of the original bankers), politically-independent Central Banks became a standard feature of the capitalist system. The Central Bankers were technocratic regulators, with a mandate to keep the monetary system stable, and operating within clearly predictable policy decisions.

Key features: easily-transportable and transferrable cash; still yet even more efficient trading possibilities; sophisticated credit markets; an efficient devaluation adjustment mechanism in the event of debt crises; lower risk of uncontrolled money printing 

Key vulnerabilities: risk of fraud; risk of regulatory capture by politicians (or even by the private sector); risk of debt crises; monetary system now entirely backed by entrepreneurial ventures and collateralised assets

Money v4.2 (Beta Version): OS “Monetary Pluralism” 

At the moment, we’re still technically operating with Money v4.1. But there are early versions of our next monetary system floating around. We’re using mobile money (in which a parallel monetary system operates alongside the formal banking sector, allowing financial access for anyone with a smartphone). We’re also engaging in crowd-funding and peer-to-peer lending, which operating as a formal-banking alternative. And then there is cryptocurrency. Although cryptofans seem to intend replacing the existing monetary system, rather than simply supplementing it.

In the context of the evolution of money, cryptocurrency makes a lot of sense to me as a currency alternative amongst a wide range of potential monetary options. But not as a standalone. So let me deal with it separately.

Money v2.2.1 (Bug Fix): OS “safer digital-commodity-based decentralised standard: revised edition”

Cryptocurrency promises to be a modern-but-retro re-envisioning of the commodity standard. That is: cryptofans would have us return to a commodity-style currency, but replace the accounting ledgers of the banking institutions with a decentralised public ledger. And thereby avoid the need for the eventual development of a central bank altogether.

It is possibly true that this version of money would remove the risk of hyperinflation and the politically-motivated debasement of fiat currencies*. But the technological freedom that came from allowing money to be based on economic activity, rather than on some historically-selected scarce commodity, coincided with the greatest economic transformation in human history. And even if you don’t believe that those two factors are causally linked, there are already ways to insulate yourself against the risk of hyperinflation (real asset investment, portfolio diversification, to name but two). You don’t need to replace the monetary system to mitigate that particular risk. And there are other risks that we haven’t even considered yet
*I say “possibly”, because it may also be that unscrupulous exchanges could simply print their own cryptocurrencies. People would eventually find out and stop using them. But that’s how hyperinflation works – people find out, and stop using that government’s currency.

The trouble with new technology

Every variation of money that we’ve created has, in turn, created new types of technological flaws that needed to be solved by the next version. Commodity-based currencies solved a trust problem, but created a security issue. Fiat money mitigated the economic consequences of deflation, but created an even greater risk of inflation.

And as the Ecocash situation is demonstrating in Zimbabwe, even a private sector monetary solution has systemic risk. Networks can break down. And if Econet Wireless went bankrupt due to a massive fraud, 83% of Zimbabwe’s economic transactions would screech to a halt.

Also, to be clear, that risk will almost certainly result in mobile money being more deeply incorporated into the formal banking sector infrastructure.

And as for cryptocurrency: we may get to remove Central Banks from the equation. But will we simply be transferring those same risks to private cryptocurrency exchanges, crypto-wallet storage services, and co-ordinated pools of miners?

The Good News

It is possible to spin the narrative of money’s evolution as a mistaken departure from the original value-based system of gold, or silver, or something else of precious and scarce nature.

But I think that you can also choose to see money’s evolution as an ever-growing variety of technological options:

• the introduction of debt did not force you to take on debt.
• the invention of fiat currency did not stop you from owning gold.
• the invention of mobile money does not stop you from having a bank account.

Monetary pluralism already exists. You can hold credit card debt, multiple currencies in multiple bank accounts in multiple jurisdictions, gold coins, a Bitcoin wallet, a stake in a fund investing in multiple cryptocurrencies, a house, a mortgage, a cellphone account with a mobile money balance, IOUs from your friends – the list goes on.

And we’ve never had quite so many ways to transact – or quite so many ways to limit the impact of a particular government’s policy on our use of a particular payment method.

Which is perhaps the technological triumph of our modern monetary system.

Just a thought.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.