The smart money

Writing in the Bank of England’s “Bank Underground” blog, Simon Scorer from the Digital Currencies Division makes a number of very interesting points about the requirement for some form of Central Bank Digital Currency (CBDC). He remarks on the transition from dumb money to smart money, and the consequent potential for the implementation of digital fiat to become a platform for innovation (something I strongly agree with), saying that:

Other possible areas of innovation relate to the potential programmability of payments; for instance, it might be possible to automate some tax payments (e.g. when buying a coffee, the net amount could be paid directly to the coffee shop, with a 20% VAT payment routed directly to HMRC), or parents may be able to set limits on their children’s spending or restrict them to trusted stores or websites.

From Beyond blockchain: what are the technology requirements for a Central Bank Digital Currency? – Bank Underground

If digital fiat were to be managed via some form of shared ledger, then Simon’s insight here suggests that it is not the shared ledger but the shared ledger applications (what some people still, annoyingly, insist on calling “smart contracts”) that will become the nexus for radical innovation. They bring intelligence to money, and some people think this is more revolutionary than it first appears. One such person is Eric Lonergan. Eric is someone I always take seriously. He’s a hedge fund manager, economist and writer. He wrote a great book about money, called Money, and he is a source of clear thinking on many issues around this central topic of shared interest. Here’s what he had to say about Bitcoin recently.

The most significant innovation in Bitcoin is not blockchain, nor the fact that it is a non-state-backed electronic currency. It is truly ground-breaking because it is the first ‘intelligent’ money. An ‘intelligent money’ is one which self-regulates.

From Intelligent money & valuing Bitcoin – Philosophy of Money

Quite, but this form of intelligence is only one kind and the Bitcoin self-regulation is only one kind of self-regulation. There are some truly surprising possibilities once you add general-purpose programmability. I have bored people to tears repeatedly with my standard four hour lecture about why the incorrectly labelled “smart contracts” will be the source of real innovation in the world of cryptocurrency and, indeed, why one of the first uses of those smart contracts (ICOs and tokens) will be much more important to the world of financial services than, say, Bitcoin. But that kind of self-regulation may not be the only thing that intelligent money does. Eric goes on to say that:

‘Intelligence’ could also embed social goals – for example the currency could self-regulate the activities for which it is used, perhaps even rewarding or punishing activities contingent on their social impact. In extremis, I imagine we will have a currency which is fully intelligent, gathers data and evolves its own rules of distribution and growth. .

As you will deduce from the subtitle of my recent book “Before Babylon, Beyond Bitcoin – From money that we understand to money that understand us” I agree. What’s more, as Eric says, “my sense is that it [intelligent money] is inevitable – indeed it could be the basis of an edge for digital currency over existing state-backed money”. That’s a pretty interesting statement from someone who is a thorough student of money. If he is right, and money becomes more closely connected with the social goals of the communities that it serves, then the future of money will look very different from both the Washington Consensus and Star Trek (that is, there won’t be a “galactic credit” or whatever, but very many different kinds of money).

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