As early as 12000 BC, obsidian was used not only to make tools, but also as a form of currency. Some time later, perhaps as early as 9000 BC, cattle became a form of currency. The use of gold as a currency has been traced to Egypt as early as 4000 BC. The first named currency, the shekel, was used in Mesopotamia around 3000 BC as a specific weight of such things as barley, silver and copper. The first actual money took the form of coins, issued in Greece, India and China around the 8th century BC. Paper money took its first form at the end of the Middle Ages when bills of exchange and bills of credit began to make their way into the trading houses as a way to facilitate commerce. Bank notes came shortly thereafter, where a piece of paper could be issued by a bank in exchange for copper, silver or gold, then redeemed for the same at a later date. In the early 1900s, the first credit cards came on the scene, taking the form of department store proprietary cards. The first bank charge card appeared in 1946. Charge cards, store cards, credit cards, debit cards all took various forms until the digital age hit and the emergence of digital wallets became prevalent. In 2009, Starbucks introduced the ability to pay with your phone in their stores. In the case of cards, digital wallets, and the like, a central host holds account balances and something (phone, web site, card, etc.) accesses the balance to use it.
So what’s next?
A central host holding accounts is a great way to go, as long as there is connectivity to be able to access those accounts. What if there isn’t? In those cases, good, old-fashioned paper and coin money is the only choice. Will paper and coin money be around forever? If not, what will take its place? How about something called cryptocurrency?
What is cryptocurrency? You may know it by one of its forms: BitCoin. There are many more. At its base, cryptocurrency is the equivalent of paper money in digital form. Where most paper bills have unique serial numbers, so too do cryptocurrency units have unique identifiers. Like you put paper money into your bank and wallet, so too can you put cryptocurrency into vaults and digital holding mechanisms like your phone. When you owe your friend some money, you can pull out a bill and hand it over, no banks involved. So too can you take a unit of cryptocurrency and transfer it directly to someone else.
Similarities to other currencies:
- If you lose your wallet, you lose your money. You aren’t likely to get it back. If you lose your phone and you put some BitCoins on it, you lose your money.
- Money is kept in vaults. BitCoins are kept in vaults. There are actually hardened vaults in places like Switzerland that serve as BitCoin banks.
- If I give my friend a specific $20 bill, he keeps that one bill until he gives it to someone else. BitCoins work the same way.
Some problems with BitCoin and other cryptocurrencies:
- They aren’t universally accepted. Most usage is online and with very few brick and mortar merchants. As of the writing of this post, just over 100,000 merchants accept BitCoin worldwide. That’s almost nothing.
- BitCoins and other cryptocurrencies are not backed by any national currency. As a result, the value of a BitCoin moves up and down more like a stock than a unit of currency.
- To give a BitCoin to someone, the recipient needs to be set up and willing to accept it. With cash, you hand it over and it’s done.
Do I believe that BitCoin or any of the dozens of other cryptocurrencies will become the currency of the future? In their current form, no. However, I do believe that cryptocurrency in general will become the next form of currency in general. Already, less than 40% of payment transactions in the United States involve cash and more than 60% of Americans see no reason to carry cash. The need for cash is dwindling, but host-based payments do not solve everything. A cash alternative is needed and digital currency seems to be next logical progression. The big question is when the first government-backed digital currency will get into circulation.