With quickly changing economic needs and a world that looks drastically different then it did 12 months ago -it makes good sense that the way we spend money will change. And in light of recent global developments, digital and programmable money has been gaining traction quickly. This is especially true as cash seems like a relic of a pre-COVID world.
But as we move towards a world of digital currency and cryptocurrencies, one has to wonder, will this recession see fiat money replaced by programmable money?
What is Programmable Money
Programmable money and digital currency are often referred to as cryptocurrencies. There are many variations of digital currencies. This is because digital currencies are flexible. Digital currencies can be adapted to work in many ways and to the unique needs of the given platform or fintech project.
Digital currencies have been in the works for decades. However, it was not until Bitcoin was successfully built on the blockchain architecture that it became a reality. Blockchain and Bitcoin go hand-in-hand, and blockchain technology is responsible for many of the changes we continue to see in the way that global finances operate.
Bitcoin’s blockchain is a totally decentralized network with global distribution. Digital currencies that run on a blockchain operate with what is called “consensus mechanisms.” That means multiple networks need to agree on the contents of the transaction in order for a transaction to be approved.
What’s more, the information is stored in multiple locations and on different nodes. So, digital transactions are not just stored by one bank or on one network. Instead, there are many copies of each transaction. This is important because if one of the networks fails, then another network has the information stored and the lost information can easily be restored.
And, because digital currencies are built on blockchain, all transactions are maintained, infinitely, and pseudonymously. More on this shortly.
Inflation and Recession
One of the major issues that the global economy is currently facing is inflation. As the economy continues to change, and we are spun into uncertainty, many governments increase spending in an effort to stimulate the economy.
Noted Nobel economist Fredrick Hayek wrote extensively on the problematic relationship between fiat-currency and inflation. The government and centralized banks control the availability of fiat currency. Inflation occurs when there is an increase in the money supply which encourages debt. Increased spending is a common approach from governments in recessionary times. Increased circulation of cash is a tactic to stimulate the economy.
However, Hayek observed that inflation increased when government projects drove up wages. As wages increase the market responds by driving up prices to meet the new income level. The further result is that we end up with indebted governments and then weakened fiat-currencies.
The overall issue concerning inflation is tied to an unstable and unprofitable economy controlled by irresponsible regimes.
Digital currencies such as Bitcoin are less prone to inflation because the value is based on supply and demand of the market, rather than artificially increasing the circulation of cash. Therefore, as more and more digital currencies enter the field, we may start to see a decrease in inflationary tactics for the simple fact that trade and transactions are fueling digital exchanges, rather than other social issues.
Banks v. Cryptocurrency
Traditional banks and financial institutions already feel the pressure to adapt to the demands of this new technology. Microsoft is building blockchain technology for businesses, JPMorgan has its own token for payment remittance and the list goes on and on.
Blockchain is ideal for hosting programmable money because it offers: an immutable record of transactions, security via encryption, and redundancy and sovereignty via globally distributed decentralized networks and computers/nodes.
If banks do not adjust to programmable money, they stand the most to lose. The primary source of income for banks is from fees, and we rely on banks as trusted third-party intermediaries. Blockchain makes peer-to-peer trustless transactions possible.
This means with programmable currencies we do not need banks because the technology is sound. Users transact with other users. That means that they also have access to account balances via the public before transactions are made. Moreover, if the funds are not available, the transaction is simply not approved by the network, thus the transaction is not completed.
Ethereum Blockchain Possibilities
Most notably is the cryptocurrency Bitcoin. This is because it was the first successful form of programmable money which came into existence in 2008. Bitcoin’s success is in large part due to its successful application of blockchain technology.
But blockchain technology is not only used for cryptocurrencies, but blockchain can also be used to store any kind of document or information sharing. It is because of this that Ethereum developed its own blockchain-based platform in 2015.
To date, Ethereum’s ICO (initial coin offering) campaign is the most successful in history. Using Ethereum’s own programmable money, the project was able to raise funds for its operations in exchange for Ether, or Ethereum’s cryptocurrency. ICOs are essentially IPOs, which means that those who hold tokens participate in the value of the overall project. ICOs are just another example of how digital currencies affect change in traditional finance.
More On the Blockchain
As mentioned, Ethereum is not simply a cryptocurrency like Bitcoin. Ethereum is a blockchain that is designed for others to build their own project on top of the existing architecture. Bitcoin is rather limited in its uses. Bitcoin is just a currency to use for exchange. However, Bitcoin is primarily held for its value.
Whereas Ethereum is much more flexible and is Turing Complete. Turing Complete means that the program can run completely, so programs can be fully automated on Ethereum’s blockchain. Turing completeness is necessary for complex contracts to run automatically. These are known as smart-contracts.
Universal Internet Program
Ethereum is designed to run as a decentralized universal internet, where users use, share, and to interact freely, without the intermediary of centralized companies. These are known as DAO: decentralized autonomous organizations. DAOs run with automated code, rather than rely on the arbitrariness of human intermediaries.
DAOs can even be programmed to use Oracles. Oracles source media and information in order to trigger contracts and even stock market sales. While DAOs are in their most nascent phase, there are countless projects in the works, and Ethereum is actively involved in supporting the various projects.
Nevertheless, currently, there are over 90,000 simple tokens built on Ethereum. These tokens represent over 90,000 projects build on Ethereum’s blockchain. Many of these projects are financial products, but they also include gaming, sports betting, and bureaucratic record-keeping.
The Politics of Decentralized Money
It is also important to acknowledge that programmable money has the potential to respond to a plethora of social issues. This is because digital currency is much more accessible for many people around the world.
Access to a stable fiat-currency is not a reality for billions of people around the world.
There is a chance that you live in a country with a stable economy with a democratic government that garners the trust of its people. However, that is a reality for a lucky few. Many live in areas with unstable economies and without trustworthy, fairly elected politicians.
Fiat currency is a currency that is registered by centralized governments and banks. As a result, fiat currency suffers when the political and economic environment suffers. And therefore, individuals suffer from bad leadership and poor fiscal policies.
When a person goes to a bank for a loan to buy a house or start a business, they are already likely facing a litany of disadvantages. If you do not have a good credit score, or you do not have enough capital, or leverage, or a family member willing to co-sign loans -then getting that first loan is nearly impossible.
Government Financial Intervention
In developed countries with free markets, we may think that money is neutral and therefore should have an equalizing effect. But this is not the case.
The value of fiat currencies is based on a number of factors. Such factors include the reputation of a government and all of the economic factors that are tied to that nation. So, if you live in a developed, democratic country, with a strong economic foundation and solid trade agreements, then your fiat currency may be fairly valuable.
But if you don’t, then you may face serious limitations such as access to a bank account, unstable/valueless fiat currency, sexism, racism, homophobia, dissenting political views, dissenting religious practices -to name a few.
Andreas M. Antonopoulos, decentralized internet and cryptocurrency advocate gave a spirited discussion of the limitations that fiat currency has over programmable money.
China, Turkey, North Korea, and Venezuela are all examples of countries where cryptocurrency has a unique value over fiat currency. All of these countries share in common restrictive government regimes and social practices.
China has been steadily collecting personal data in order to control any number of civilian activities. Currently, it is easy to prohibit an individual from purchasing a plane or train tickets. If a person happens to hold dissenting political views, as is the case with journalist Lui Hu, you may be cut off from many necessary services and civil liberties.
Fiat currencies have also failed in Greece, where the economy crashed due to poor economic management. Yet another example is the US mortgage crisis of 2008, that caused the most serious recession since the crash of the 1920s stock market.
Incidentally, Bitcoin, the non-fiat digital currency, was created in the wake of the 2008 mortgage crisis. Satoshi Nakamoto, the creator of Bitcoin, saw the crash of 2008 as yet another demonstration of the American government’s incredible lack of fiscal propriety.
And while no one is happy when their investments lose value, just imagine going to your bank one day to find all of your money is gone. You have not been robbed, rather you have been found to hold the wrong political or social views. Or perhaps you’re a woman whose father would not allow you to open your own bank account, so he has access to your funds whenever he likes.
These examples are not fiction. These injustices occur every day to good people who live under fascist regimes every day. For many, the simple act of control over personal income and the assurance that their money will be there tomorrow is not a given.
Equality Through Anonymity
Digital and programmable money provides a safe and equalizing alternative to such injustices. Because digital assets are anonymous, decentralized, and global, digital currencies, they do not discriminate based on sex, race, or political views.
What is more, with programmable money, financial records are globally distributed. So, if your information is lost in one location, it is not lost in all locations. Blockchain stores all transactions immutably, which means there will always be a record available.
With programmable money, your money is far more secure and far less susceptible to theft than your money is in traditional banks. Banks are centralized, which means their information is all stored on one network, making them far more susceptible to theft and political influence.
Access for the Unbanked
Presently, there are billions of adults in the world who are unbanked, which means that they do not have bank accounts. While the majority of such people live in developing nations, there are also millions of people in the United States that do not have bank accounts.
The reasons people do not have bank accounts are similar to the problems with fiat currency and centralized banks already discussed. Many women in developing areas around the world do not have bank accounts, even though they are the primary or sole income earners, for the simple fact that they are women, or that they do not live near enough to a physical bank.
Secure blockchain applications are creating access to digital wallets for cryptocurrency, which gives female entrepreneurs the ability to securely track their assets. What is more, blockchain has also made microloans more accessible and reliable in remote places of the world. All anyone needs are access to the internet or to have cell phone data, which is becoming increasingly accessible.
Location is indeed a factor that limits one’s accessibility to a bank account. If you do not live near a bank, getting to it is a real problem. And this is a problem for many, even in the United States.
At this point in time, what we can expect is change. Recessions are painful for everyone. However, recession can also be a wake-up call for financial institutions, governments, giant corporations, as well as individual people.
Programmable money makes global exchange far more possible, as it allows individuals and entrepreneurs to interact with one another with greater ease than ever. Currencies that run on blockchain make trustless peer-to-peer transactions a reality. Moreover, they call on traditional financial institutions to adapt to the changing needs of their customer base. And for customers to take back some of their power.
In the age of the world wide web, banks and government no longer hold the privileged places of power that they once did. With projects like Ethereum and DAOs, we are seeing a major transition to individual autonomy. This is not just a transition to efficient automation and digitization. It is also a transition to a new kind of equality through decentralized power and secure autonomy.
To paraphrase Andreas M. Antonopoulos, digital currencies do not care about your race, gender, or ancestry. Programmable money may well be a solution to the problem of recessions and unstable fiat currencies. But they may also be the solution to a great deal of inequality caused by lack of access and antiquated elitisms.
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