From Euro to e-uro

Cur­rency mar­kets have been roiled by the debt cri­sis in sev­eral Euro­pean coun­tries, lead­ing many to think that one or more coun­try could leave the Euro-zone within the next few years. This has led many to won­der how to print new cur­rency but there may be a way to han­dle such a change with­out print­ing a sin­gle cur­rency piece: by going down the route of a dig­i­tal cur­rency, some of the coun­tries which are think­ing about leav­ing the Euro could find them­selves pio­neers in the next evo­lu­tion of currency.

What is dig­i­tal currency?

At its core, dig­i­tal cur­rency is a type of cur­rency that only exists elec­tron­i­cally. It is not traded as coins or paper but rather as elec­tronic exchanges on com­put­ers and com­puter networks.

Since the early 1990s, a wide mix of lib­er­tar­ian and cypher­punk thinkers have been try­ing to fig­ure out a way to make an elec­tronic ver­sion of cash, com­plete with its anonymity and liq­uid­ity fea­tures avail­able. While the anonymity part had, for the most part, been resolved by the early 1990s (cryp­tog­ra­pher David Chaum, who founded Dig­i­cash, the pio­neer in the field, had research papers on those aspects as early as the late 1980s and had imple­mented the core basis of an anony­mous cur­rency by the very early 1990s), the chal­lenge for dig­i­tal cur­rency has been one of trans­ac­tion volume.

With some small changes, sys­tems that were orig­i­nally planned for all-digital cur­ren­cies were even­tu­ally adapted to sup­port exist­ing legacy cur­ren­cies like dol­lars and euros, lead­ing to the rise of com­pa­nies like Pay­pal, with a cen­tral­ized clear­ing sys­tem not dis­sim­i­lar to those in more tra­di­tional pay­ment sys­tems like Honk Kong’s Fel­ica–based Octo­pus smart card pay­ment sys­tem, which is prob­a­bly the most suc­cess­ful imple­men­ta­tion of a store-and-forward pay­ment sys­tem in the world.

Sim­i­larly, in the US and Europe, recent deploy­ment of store-value cards and NFC tech­nolo­gies have estab­lished a poten­tial infra­struc­ture for build­ing out a pos­si­ble way to elim­i­nate phys­i­cal cash over the long run. Over the last decade, the rise of inter­net pay­ments, elec­tronic deposits, and elec­tronic deb­its has low­ered the reliance indi­vid­u­als and cor­po­ra­tions have had on paper checks, lead­ing to a sub­stan­tial drop in the amount of busi­ness done around check-related prod­uct lines. It is assumed by many in the finan­cial indus­try that checks are on their last legs.

So what about cash?

Cash has a very long his­tory and seems to have gone from one tech­no­log­i­cal rev­o­lu­tion to the other with­out being dras­ti­cally impacted. In fact, a his­tory of cash seems to point to cash being closer to a con­cept that can attach itself like a remora to the lat­est tech­nol­ogy. So while coins used to be the only way to trans­act cash prior to the inven­tion of the print­ing press, cash even­tu­ally came through the first infor­ma­tion rev­o­lu­tion stronger as cur­rency became some­thing printed on bills and thus became eas­ier to carry around.

With the advent of the tele­graph sys­tem, cash started being deliv­ered more as a con­cept, using a store and for­ward approach whereas one could go to a tele­graph office and send a promis­sory note over the air. The sender would pay the tele­graph oper­a­tor and the tele­graph oper­a­tor would then work out cred­its and deb­its between the dif­fer­ent offices, only mov­ing phys­i­cal cash when actu­ally needed. The same con­cept basi­cally moved from tele­graph to tele­phone to fax machines to the inter­net and now to mobile phones. Dif­fer­ent modes of dis­tri­b­u­tions but fun­da­men­tally the same concept.

The intro­duc­tion pre­paid cards (also known as stored-value cards) in the last decade has made it pos­si­ble to move cash into a fairly anony­mous plas­tic con­tainer that can then be used to make pay­ments wher­ever the cur­rency it has been filled with is accepted. With play­ers like Visa and Mas­ter­card in the game, it is easy to find net­works that sup­port such offerings.

Back to the Euro crisis

For coun­tries in the Euro-zone, there is now a choice: either agree to a more cen­tral­ized man­age­ment of their econ­omy from the Euro­pean Union or decide to strike out on their own.

The for­mer would lead those coun­tries to become more like states in the United States, where they have some level of auton­omy but also must ensure align­ment with a larger fed­eral entity. The net result, in the long run, for the coun­tries that decide to go down that route, is that they will help forge a United States of Europe, with closer coöper­a­tion and even­tu­ally a con­cept sim­i­lar to fed­er­a­tion mak­ing its way through that union (I’d put the prob­a­bil­ity of this hap­pen­ing as fairly high within the next 25 years)

The lat­ter is a more inter­est­ing case, from a tech­no­log­i­cal stand­point, because it would mean fig­ur­ing out how to fill the gap and this is where a dig­i­tal cur­rency makes sense. If you look at the USA, which came of age in a time when paper cur­rency had become common-place, the vast major­ity of the cash being traf­ficked is through bills in denom­i­na­tions as low as $1 (there are $1 coins but they are not very com­monly used.) By com­par­isons, Euros and other Euro­pean cur­ren­cies do not have a bill for a sin­gle unit of cur­rency and still hang on to coins for that pur­pose: this is due to the psy­cho­log­i­cal con­cept of money of more tan­gi­ble and since the lower end of cur­rency is han­dled more often, peo­ple may want to feel it in their hands.

So what if a coun­try that decided on build­ing (or rebuild­ing) a cur­rency from the ground up were to do so in today’s day and age?

First of all, we are deal­ing with a world where elec­tronic pay­ment sys­tems have become more com­mon, with ATM and credit card read­ers reach­ing near ubiq­uity in every­day com­merce. At the same time, we are deal­ing with a world where mobile phones are becom­ing some­thing that every­one car­ries. Look­ing at those fac­tors, is it too much of a leap to imag­ine a world where a cur­rency could be added and sub­tracted from phones or pre-paid cards. Why would one need phys­i­cal cash in today’s world? Are there use cases where the legal trans­fer of money from an indi­vid­ual to a com­pany and vice-versa could not exist in an all-electronic world?

I’d war­rant that no. There is no rea­son why cash needs to remain a phys­i­cal com­po­nent. For starters, the gov­ern­ment could dis­trib­ute e-wallets to any of its con­stituents rel­a­tively cheaply (today, the cost of a pre-paid card with no value on it would be mea­sure in cents in the US) through bank net­works. Some ATM might have to be retro­fit­ted reload­ing of cards but that would be about it (they can already read the cards today). And with just such a move, a whole coun­try would have moved from a phys­i­cal cur­rency to a dig­i­tal one.

So the ques­tion now remains as to which coun­try will be bold enough to make that first move. To go elec­tronic would prob­a­bly be sub­stan­tially cheaper than any other alter­na­tives a coun­try would have to con­sider if it decides to cre­ate or relaunch a cur­rency… and that’s why this option should be the top on the implemeta­tion table for coun­tries that are lean­ing in that direction.