Yesterday, Apple announced that one of the features to be included in iOS 11 was the ability to use their iMessage protocol to send money.
Author Daniel Priestley commented about this on his Facebook page; here is an excerpt:
Facebook, Apple, Amazon and Google will issue the money of the 21st century. The Apple Dollar will float against the Amazon Coin the same way the USD exchanges to the GBP. As the world becomes less and less about geography, currency will be issued by the tech giants rather than countries.
It’s a provocative statement, and I’m not sure I am as willing to go so far as Priestly does; Apple is not actually issuing its own currency. Yet Bitcoin, Ether, Ripple, and their like are indeed currencies, existing apart from any sovereign fiat currency, so perhaps in some ways Priestley’s vision is not that far off the mark. But something about the way that Priestley presented this as a 21st century phenomenon got me thinking about historical context, and the more I think about it, the more I am coming to realize that like many recent tech revolutions, cryptocurrency is in many ways not so much something new as a technology-enabled return to something quite old. In this case, that old something is private money.
Most people living on the planet today take for granted the idea that currency is something issued exclusively by sovereign governments, but this has not always been the case. In fact, paper currency for most of its history was issued far more regularly by private banks than by sovereign governments. That is why they are still called banknotes. Some governments did experiment with issuing their own banknotes, Napoleon, for instance. But since its inception in Song Dynasty China in the 11th century, paper currency was mostly issued by banks.
For most of the intervening years, only a few well-established and respected banks issued notes for public circulation. But in 19th century America, the issuance of banknotes exploded. During the height of what is now called the Free Banking Era, almost anyone could issue currency, and many did. Not just banks, but retailers, restaurants, even individuals. There were literally thousands of different currencies in active trade. Nominally, a dollar was a dollar regardless of who issued the note, but in reality the value of each private currency depended wholly on the fortunes of the issuer. If the issuer went bankrupt, as many did, their currency became worthless. So being a savvy trader in the free banking era meant keeping careful track of the current and projected future value of the currency you held or the currency you traded in.
Eventually, too many people got burned and the government felt compelled to intervene; the result was the set of federal reserve notes we still recognize today as legal tender. The rest of the world followed suit, and by the start of World War I, almost all currency in circulation was government issued (though some private money survives to this day: the currencies of both Scotland and Hong Kong, for instance, are still issued by banks rather than by the government).
The result of this change was that people no longer had to worry about the provenance of their money. It’s purchasing power might be subject to inflationary pressure, and its value might ebb and flow when compared to the currency of other countries, but you no longer had to worry about whether one dollar was as good as the next.
With the rise of bitcoin, ether, ripple, and other altcoins and cryptocurrencies, the one-century or so historical aberration during which we could take the provenance of our money for granted has come to an end. As traders, bankers, and consultants, we once again need to think not only about the most suitable financial product for a given use case, but also the most suitable store of value. It is in many ways similar to the profusion of fake news. For a brief period in history, we were able to take the provenance of our news for granted, but recent events have caused us to revert to the historical norm of needing to examine the provenance of our news critically.
Why does all this matter, and what lessons can we who work with blockchain, cryptocurrency, or indeed journalism, consider as we plan our future? The Free Banking Era came to an end because it presented enormous opportunities for both arbitrage and fraud, and because those opportunities were enthusiastically exploited by the speculators and criminals of the day. By studying this history carefully, those of us who believe in the transformational benefits that cryptocurrencies and distributed ledgers may be able to mitigate the worst of these excesses, and perhaps avoid the loss of innovation that would inevitably follow from a massive government intervention similar to the one that brought the Free Banking Era to an end. At the very least, if we are able to avoid at least some of the mistakes of the past, we may earn for ourselves the opportunity to make entirely new mistakes. Surely that is worth something.