Digital Currencies Ain’t Nothin’ New
Even in our highly digitized world, a significant percentage of the population continues to dismiss digital currencies of all flavors. Detractors of cryptocurrencies such as Bitcoin are all too ready to reject their long-term utility, credibility and viability based on a number of complaints ranging from their lack of legitimacy to shaky security. The problem with most of these criticisms is that they could be leveraged against currencies that have been widely in use for decades. Ledger-based currency systems are ancient concepts – in fact, there is nothing revolutionary, novel or weird about their fundamental underpinnings. Looking back a few millennia, our ancestors would have been surprisingly familiar with these types of financial systems, and that was long before anything as fundamentally solid as a cryptographic blockchain.
Nothing New to See Here
There is a pervasive myth that our modern money systems somehow date back to a time of bartering and haggling. Despite the great Adam Smith’s best attempts to convince us otherwise, the bartering of sheep and goats is highly unlikely to have formed the foundation of anything resembling a currency or coinage. The best current research indicates that bartering was at most something that occurred between strangers; daily transactions of fellow villagers were most likely based on tokens which represented values and debts, and that these types of ledger-based systems were pervasive around the globe.
The reality is that, once humanity developed writing, we recorded debts between parties using a ledger. Ledgers are the most ancient form of money there is, predating coins, tokens and bartering. Throughout history, ledgers were used to record debts and tokens used to trade and transact those debts .
Centralized “IOU” statements became what we refer to today as the principal book of account, with decentralized tokens and notes acting as currency. The level of sophistication of these systems obviously varied, but it is clear that the most complex and sophisticated systems were based on debt, and used currency as a token for that debt, with the actual value of the debt far exceeding the value of the representative tokens in physical existence. The most spectacular example of this is the £1.2M loaned to King George III in exchange for the exclusive right to then resell the £1.2M in debt, which laid the financial foundation for the British Empire.
A Modern Take on an Old Story
At their most basic level, modern virtual currencies work in a similar way to ancient, ledger-based accounts. Values are based on nothing more than an understanding between two parties of the unit of debt. In the case of Bitcoin the unit of debt is created through the process of mining and providing transaction verification on the Blockchain. Modern distributed ledgers record the existence of the unit of debt and track its exchange in an open, transparent, verifiable and permanent way.
Sprouting up independently in the Fertile Crescent of the Middle East, as well as in Asia and Europe, ledger-based monetary systems represent the most consistent forms of currency in history. In fact, monetary systems based on ledgered debt with tokenized currency persist to this day in tribal populations around the world. The fact that we are now digitizing, encrypting and automating ledger-based monetary systems should not be a surprise to anyone. This is not the shock of the new; this is more about getting back to basics. Through the blockchain, we have established a global currency utility that can be used by anyone with a connection to the internet. It’s truly an evolutionary step in a long tradition.