Money has become so common in our society that we barely think about what money actually is. At its core, money is a way for humans to move value through time and exchange goods.
From the fundamentals of where money began, well take a look at how money developed and finish off with some ideas of where the future of money is headed and what we might see in Malaysia in the future. Enjoy!
What is money at its core?
Back in the day, the basis of value exchange was to trade. If I was a farmer and my neighbor was a blacksmith, we both specialized in something. I could supply him with milk and meat, while he could supply me with steel and ironwork. However, the valuation of, for example, milk and steel, might not always be convenient for both of us to do a direct trade. 1kg of steel might be worth 5 buckets of milk, but my neighbor only wants 1 bucket. What then?
To solve this issue, people came up with money, or more accurately, people came up with debt. I could do a trade with my neighbor and give him 1 bucket of milk now, and promise him that I’ll give him the other buckets when he needed them. My neighbor and I are good friends, of course, so he can trust me to fulfill that promise. That is most likely how the first debt was created.
But just debt was not enough. In that system, the blacksmith has to commit to a purchase of 5 buckets of milk every time he wants to sell me steel. That is not very convenient, people needed a measure of debt that was more easily transferable and divided. So people came up with money. I could give my neighbor something that we both agreed had a certain value, which we could both use easily. This ‘currency’ had to fulfill a set of simple criteria:
- The value needed to be stable and agreed upon by both parties
- The currency should be easily devisable so that it is easy to use
This is how gold became the standard of our current currency system. Gold had an agreed upon value and could be easily traded. With gold being the established guarantee of value for currencies, our global currency system has kept evolving through the ages to the point where we now have an extremely complex currency system with hundreds of different currencies and even more money derivatives and money substitutes.
How is money used today?
We have come a long way from the days of the farmer and the blacksmith. Our transaction system is now managed mainly by banks, credit card companies and related parties. The bank provides people with a convenient way to transfer money and it provides a measure of security. If money gets transferred into your account you can be relatively sure that it won’t be stolen. It also creates a sense of trust between parties that might not trust each other, this is immensely valuable in terms of fraud prevention.
This gives people a whole range of different ways to exchange value. If I go to a restaurant today, I can either pay cash, use my debit card or use my credit card. Even better, if you are a regular customer you could use a customer loyalty card with benefits or you can keep a running bill.
In the end, we are all different and the many different ways we can pay for our consumption is reflective of the diversity among people.
How will we use money in the future?
Money today is one of the most important aspects of human life. We spend our entire life earning and spending money. It has become an intricate part of our current economy, we live and die by it. Money is still used as a way to exchange value. However, the whole concept from which it started has kind of faded into the background. Our whole currency system has become an abstract evolution of how the farmer and blacksmith first exchanged value.
With an increasing amount of money being online, the physical currency system is slowly being replaced by an electronic system of value exchange. Debit and credit card transactions are rapidly increasing while physical cash transactions are on the decline. New developments like Samsung/Apple Pay and the enabling of contactless payments show that we are not yet satisfied with the status quo.
Contactless payments significantly cut down on payment time and with the increased integration of payment and online applications, doing a transaction is becoming easier and easier.
Even though our value exchange system has come a long way, it is still not flawless. If we look at how money has developed in the past and at the current developments with transactions, especially cryptocurrencies, we can see a trend towards a value exchange system that transcends physical money by miles.
The power of cryptocurrencies
A lot of people feel that the current burden that the banking system is placing on various transactions is disproportionate and extremely vulnerable to disruption. Cryptocurrencies such as Bitcoin, provide a way for people to exchange value that is completely outside the reach of banks.
The biggest issue with the current system is transaction taxing. An exchange of value should not be subject to tax by a third party. Right now, value exchange is heavily regulated by the government, banks and credit card companies. If I want to exchange euros for ringgit and send them to a Malaysian bank account, I am going to pay a significant amount of money to the various companies and institutions involved. It is far from a direct exchange system. In this case, my own bank takes a cut and the Malaysian bank also takes a cut. Some governments even prohibit the direct selling of their currencies, to protect it against fluctuation.
This is where cryptocurrencies come in, cryptocurrencies give people an alternative to the traditional banking system. For example, a payment over the Bitcoin block chain bypasses any third party and is strictly peer-to-peer. Theoretically, this should be faster and cheaper because there are fewer parties involved. Because of Bitcoin’s decentralized verification system, there is no longer a need for a third party to ensure trust.
What are Cryptocurrencies?
A cryptocurrency is a form of money that does not require a trusted third party to verify transactions. Where a regular money transfer is guaranteed by your bank, a cryptocurrency is verified by millions of computers around the world who reach a shared consensus. This allows for peer-to-peer transactions that do not involve a third party, which could theoretically be faster and safer than regular money transfers. The underlying technology that makes this all possible is called the blockchain.
What is a Blockchain?
A blockchain is a distributed database that can be used to maintain an ever growing list of records, called blocks. Each block contains a time stamp and a link to a previous block. Blocks cannot be retroactively altered. When this ledger is distributed over a peer-to-peer network, it can use all this computing power to verify new blocks. This is a revolutionary way to verify data without a trusted third party.
Bitcoin was the first widely accessible application of blockchain technology. It uses blockchain to make sure that transactions are safe and reliable, without needing a bank to do it. Although it sounds promising, Bitcoin is still facing a lot of issues that prohibit the technology from really taking over the payments industry:
- Price is not stable – The price of Bitcoin is extremely volatile. This is mainly because people don’t understand how to value it and because the value of Bitcoin is heavily dependent on its adoption rate. The more people use Bitcoin the more valuable the currency becomes.
- Not easy to use – Because the price is so volatile, it is extremely unpractical to quote prices in Bitcoin. Imagine pricing something in Bitcoin, only to have it drop in value by 20% the next day.
- The network is overloaded – due to the rapid adoption rate of Bitcoin, the software cannot keep up with the increased use of Bitcoin’s blockchain network. Transaction speed is a real issue for Bitcoin right now.
To get some more insights, we interviewed Suraya from RinggitOhRinggit.com, one of the leading Bitcoin and personal finance bloggers in Malaysia. Ringgitohringgit.com specializes in personal finance, investing, nonprofits, cryptocurrencies, and FinTech. Enjoy!
In your opinion, does Blockchain technology have the potential to disrupt traditional payment systems such as Visa and MasterCard?
‘’Blockchain technology have already disrupted traditional payment systems by proving that trust can be transferred from third parties to the network itself. This is a big shift; many applications that use blockchain technology is designed to be so secure and reliable that the value proposition of traditional payment systems, especially online-based, becomes almost redundant. ‘’
In your opinion, what is the most practical/beneficial use of cryptocurrencies in Malaysia right now?
‘’It depends on the user. For many people, cryptocurrencies were used as a store of value to hedge against RM. Others use it to make money transfer to their children studying overseas, for example. There is growing number of merchants that accept cryptocurrencies as payments as well.’’
Which of the many cryptocurrencies out there today has the most potential to become a widely accepted form of payment in Malaysia?
‘’As of right now, bitcoin. It still enjoys the first-mover advantage and has the most mature ecosystem as compared to the rest. Thus it has the most potential.’’
Bitcoin transactions take a while to complete right now. With new changes coming for the Bitcoin network (Segregated Witness / Lightning Network) do you expect this to improve in the future?
‘’Depending on Bitcoin network’s congestion at the time, bitcoin transactions with low fees can take a very long time to clear. The Bitcoin community is hopeful that the changes will allow more transactions to be processed, thus lowering fees and reducing time.’’
What is the most important thing that people need to know about cryptocurrencies?
‘’That just like fiat (regulated currency), there are also parties that use the cryptocurrency name to create unsafe investment opportunities. Some examples include offering investors ‘coins that have the potential to rise in value just like Bitcoin’ (many of them have no real technology to back up the claim), Ponzi schemes, pump-and-dumps, and more.
Another important thing that people need to know about cryptocurrencies is that digital security is extremely, extremely important. Hackings happen. ‘’
Safe to say that exciting times are ahead in the payments industry. Check out Suraya’s blog for more news regarding bitcoin’s and cryptocurrencies!
So will we all use cryptocurrencies in the future?
Hard to say. If Bitcoin can achieve a stable and manageable price point, increase its usability and find a way to manage the increasing traffic then Bitcoin could be a serious adversary to traditional banking systems.
Besides Bitcoin, there are a lot of other cryptocurrencies that are on the rise and blockchain technology is definitively here to stay, with major banks already dedicated massive resources to it. Your wire transfers might become a lot faster in the future when backs start to implement distributed ledgers in their IT environments. Whatever the future may hold, it’s important to stay on top of the latest trends in finance so you won’t get caught off guard when new technologies hit the market.