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Digital Currencies are the next Central Bank of the Internet

This is my third article, in as many weeks, my intent being to re-frame the whole blockchain and distributed ledger technology story. In doing so, one of the terms I have deliberately tried to avoid is distributed ledger technology as it does little to capture the imagination. Instead, I have attempted to highlight the opportunity to combine three distinct pillars, the holy trinity of payment, general ledger and store of value, into one. Because this happens via an electronic algorithm, it means conditions can be included, or, in other words, a contract. This is a hugely important opportunity as it creates a platform upon which real business can be undertaken, i.e. the delivery of goods or services, for the exchange of value, against a set of conditions, recorded in a ledger for future reference. It is the technology underpinning Bitcoin that allows this, that bad boy subject of the financial press, sure to raise questioning eyebrows, and evoke immediate references to bubbles, terrorism financing and organised crime. Although, as WannaCry showed, the eyes of the world can watch the wallet into which some of those early payments were made(1) making it possibly not the platform of choice for laundering money.  

Digital currencies

Digital currencies have a central banking like quality to them. The Bank of England issues notes which are backed by debt instruments lodged by members of the Notes Circulation Scheme. The Bank also ensures full settlement of value exchanged between counterparties on a daily basis through real time gross settlement. In both cases, these are digital events, recorded in ledgers, with value being attributed by virtue of an associated debt instrument. With computer code, it is relatively easy to create something notionally called a digital currency, but to impart value to it, requires some level of magic. Digital currency technology solves the value piece by requiring the consumption of energy, or work, to resolve a cryptographic problem to create information which is unique. This is exactly the same for a debt instrument which has previously acquired value by virtue of work, or expended energy, being undertaken for which value was received and transferred to the issuer, so creating the debt.

For something to be classified as money, it needs to be a store of value, a unit of account and medium of exchange. In general terms, any physical object or intellectual concept can be a store of value; its value is a function of what people will pay for it in an open market, depending on its utility and features, such as its permanence, or uniqueness. Precious metals acquire value in an open market by virtue of their rarity, and utility. For example, gold is in an important metal in engineering, it can be turned into jewellery and is very difficult to make, requiring a supernova; it has intrinsic value. Whereas paper, with little intrinsic value per se, acquires value when a design is applied, and a serial number added, so creating a five-pound note. The visual design imparts unique information, and the associated debt instrument, imparts economic value.  A unit of digital currency is unique information, which has taken measurable energy to create. 

Bitcoin 

Bitcoin is in many ways the Stephenson’s Rocket of digital currencies. And we should treat it as such; theoretically possible with a working proof-of-concept, but with far better practical implementations. Digital currencies now have some 900 traded pairs, versus the 180 fiat currencies, with far better features than its progenitor technology. And because this is based on software, it’s easy to create, limited only by the imagination of the team developing the currency. In its base form, it creates a platform upon which services can be tokenised; digital assets can be created representing goods or services which can be bought or sold, creating a secure, virtual commercial layer which sits between the supplier and customer, no matter how big or how small.  It combines banking, accounting, contracting, and payment, allowing us to move from physical commerce to completely digital commerce, creating a novel design space for new kinds of institutions. Digital currency technology provides trusted digital attestation, combining the roles of the different trusted intermediaries in the value chain that supplies goods and services.

Reducing the role of government

Milton Freedman said in 1999, “I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, […] is a reliable e-cash, a method whereby on the internet you can transfer funds from A to B, without A knowing B or B knowing A.”. Digital currencies allow this. This week saw one such use case emerge, drawn in sharp relief by Travelcoin. Travelcoin have embarked on a capital raising exercise, aimed at building a platform which creates a digital currency to support the travel industry. The team behind the concept are seeking to remove the friction of currency conversion charges, the need to carry cash, and the bank fees associated with using ATMs and credit cards in foreign countries. Whether the team succeed is a question of time, but it’s the ambition which is important. Software is the new digital currency, and its application is limited only by our imagination.  

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1. https://blockchain.info/address/12t9YDPgwueZ9NyMgw519p7AA8isjr6SMw which is the Bitcoin Blockchain URL for the WannaCry online wallet


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Accounts Receivable Management
Billing Systems & e-Invoicing

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