The Future of Money in the Information Age

Sometimes the products of intellect are best appreciated several years after their first appearance, their anticipatory power becomes clear with the passage of time. It is the case of  “The Future of Money in the Information Age”, a collection of essays written by several authors and scholars.

The publication was issued in 1997 by the Cato Institute, an influential libertarian think tank, and was edited by James A. Dorn. The book explores the potential transformations of money, banking, financial regulation, taxation and trade generated by the evolution of digital technology and the explosion of the internet. There are contributions from both academics and practitioners, representing different perspectives, including a short essay by Alan Greenspan, former Chairman of the Federal Reserve. In 2012 the issues analysed in The Future of Money are vivid and actual: the number of Internet users reached the level of 2,26 Billions and the amount of computing power commercially available is growing exponentially, creating the conditions for a further digitalization of financial services and institutions. Moreover, a global financial crisis weakened the faith in the ability of the existing financial architecture to promote stability and growth. This is probably the time when financial services, like other industries such as media and publishing, are most likely to be disrupted by digital innovation.

Even if the technological paradigm was different, during the 1990s social networks, cloud computing and smartphones were only in their embryonic form, The Future of Money identifies in a clear way some of the key drivers issues that are now disrupting the financial landscape. First of all, ecommerce: after the internet bubble of the 1990s, electronic commerce is now an established reality and produces a significant slice of revenue in many industries. Secondly, financial innovation: established companies, like PayPal, or emerging ones, like Square, are disrupting the payment arena and new startups, like the one the are presented periodically in the Finovate Conferences, are innovating other areas such as personal finance, trading and investment management. Finally, banking and monetary policy: besides the operational impact of information technology, related to an increase of speed, efficiency and computability of financial transactions, there is a more radical transformation that will potentially change the fundamental elements of the economic system.

The creation of reliable forms of virtual currency will change dramatically the way in which political institutions govern the economy, such as taxation and regulatory authorities, and will probably transform central banking and the related monetary policy techniques. Virtual currencies will be harder to tax and control, will open the possibility of monetary experiments that, until now, were reacheable only at the local level, as in the case of Gesellian currencies that devalue with time. Most of all, virtual currencies will provide a potential new landscape of monetary competition and massive experimentation, something impossible in a system when currency emission and control are prerogatives of nation states and central banks.

The first two elements that we mentioned, ecommerce and operational financial innovation, are now fully unfolding: they are disrupting the business models of entire industries, such as the music industry, and are changing the landscape of market dynamics, as in the case of high frequency trading. Besides that, the impact of virtual currencies is still in its infancy. There are several experiments of virtual or quasi-virtual monetary systems, such as tokens, credits and game scoring tools, and sometimes there is a burst of media attention to specific currency systems, such as the Bitcoin. Moreover, there are several experiments of complementary currencies and local currencies that are based on digital platforms, such as the Sardex, a commercial credit system now diffused in Sardinia.  The bottom line is that now there is not a single dominant system or a set of universal principles that can create the “perfect” virtual currency, rather we have a coevolution of different models and tools that are specialized to address the needs of single communities and ecological niches.

The challenges related to the creation of virtual currency systems are still huge: cybersecurity, the need for effective encryption and protection of transactions and wallets, regulation, the fact that monetary systems are heavily regulated with different approaches in each country, stability. The problem that controlling inflationary and deflationary dynamics is not easy and that design of institution and rules is a key element. These issues are a limit but, in them, there is the seed of the future relevance of virtual currencies: they have the potential to overcome the limitations and burdens of traditional forms of monetary regulation. There is a big, open space to produce new platforms for currency creation ad management. Money in the information age is still in its infancy.