03 Nov 2020

The future of money and payments

Chris Becker

Blockchain technologies lead, Investec

Banking in 10 or 20 years’ time might be as different as Google Maps is to a folded paper map.

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In the last few centuries, money has changed a lot. During the 17th and 18th centuries a variety of monies were used, including ostrich shell beads and the rixdollar, the first banknote in southern Africa backed by silver.

In the 1800s, gold grew in prominence as money around the world. By the mid-1800s, there were 32 private banks, two mining companies, and one trading company all issuing private banknotes in southern Africa that were a claim on gold.

After a severe fiscal crisis in the late 1800s, the rixdollar collapsed, but gold survived as money.

 

 

south african reserve bank
The Reserve Bank is 99 years old this year

The South African Reserve Bank (Sarb) was formed in 1921 by an act of parliament to stabilise financial conditions. At the time, the value of gold varied between South Africa and London, which led to an outflow of gold to Britain and threatened banking stability.

For 40 years, the Sarb implemented and managed a foreign monetary standard. South Africans used the SA pound, which was linked to the British pound sterling and defined as a fixed weight of silver. This in turn was convertible to gold. The Sarb promised to pay bearers of its banknotes a stated amount of pound sterling.

It wasn’t until Valentine’s Day in 1961 that the Sarb created and put into circulation the first rand.
1971
when currencies were finally cut off from their gold backing
As society and technology change, so does money

In the 19th century, anyone who could build a gold vault and write and issue a banknote certificate could get into the business of banking. There were virtually no licensing requirements. Similarly, a payments business was a courier company that moved banknotes or gold between banks and/or merchants and/or consumers.

In 1971, currencies were finally cut off from their gold backing. In the same year, Intel produced the first microprocessor, the 4004, and the era of electronic money began.

In 2020, most money in circulation is electronic. Visa, Mastercard, Swift, and Bankserv are the new electronic courier companies as they courier electronic financial messages between banks, merchants, and consumers.

Similarly, the business of banking is still at its core about the safekeeping of client funds and keeping track of debits and credits, but banks now issue electronic credits in exchange for electronic or banknote deposits.

5,000
number of years that gold has retained its value
If money is not linked to gold, how is supply kept scarce?

For money to have value, it must be trusted and reliable in its future exchange value. To have value in the future, it must have a predictable supply. In other words, money must have a predictable mechanism to remain scarce and in limited supply.

Gold’s physical properties and limited supply on earth made it an excellent form of money and allowed it to survive and retain its value for 5,000 years.

When money is not linked to gold, supply is kept scarce by imposing laws and regulations, giving the power to mint new coins and banknotes to a trusted institution like a central bank. The Sarb is tasked, in terms of the Constitution, to maintain the value and scarcity of the rand and balance economic growth.

But when money is an entry in an electronic database, an Excel spreadsheet or electronic ledger, how do you keep it scarce if it can be created at zero extra cost?

The monetary technology itself doesn’t govern or self-regulate scarcity. Money becomes a legal and regulatory technology.

Enter blockchain

Regardless of the view of the blockchain, this is its fundamental innovation. This technology system regulates the scarcity of a fully electronic currency that has no real-world dependencies.

And this regulation is incentivised by the economics created by the currency unit itself. The technology also has its own native messaging system, where payment instructions are communicated from ‘wallets’.

For the first time in history, there exists a scarce currency, ledger and payments system in a single open source technology system that anyone can connect to with existing internet protocols. It introduces new technologies, players, companies, jargon, skills and resources, and so on. This is not an endorsement of bitcoin, it is simply a statement of fact.

The invention of bitcoin has set off a series of innovations, leading to a Cambrian explosion of experimentation with blockchain technologies.

blokchain tech
Managing a fundamental change in technology

What we do remains the same, but the technology we use is constantly changing. For example, we watched movies on VHS video tape, but now we stream them on Netflix. Although the technology has changed, it did not make movies disappear.

The form of money and banking may change, but its fundamental function will remain the same – the communication of value. The same applies to money and banking. Blockchain may fundamentally disrupt the way banking services are distributed to, and consumed, by people.

How can we use this technology?

Investec Private Banking investigates the various blockchain use-cases such as cryptocurrencies, digital currencies, central bank digital currencies, tokens, digital identity, smart contracts.

Investec’s blockchain team participated in Project Khokha in 2018 where the Sarb tokenised the rand on the Quorum blockchain. Together with Bankserv, we designed a blockchain digital identity system. We have also secured cryptocurrencies in hardware wallets.

We learnt that while blockchains are secure distributed databases and open up a range of potential use-cases, it means very little when the interface to connect to the blockchain is not secure.

We don’t know what the future of money looks like exactly. No one does. What we do know is that we have a role to play as a private banking partner to help our clients and broader society navigate the change in the world of money and investments.

Banking in 10 or 20 years’ time might be as different as Google Maps is to a folded paper map. We are applying our experience and expertise in this innovative technology ecosystem to build digital asset custody capabilities, in close collaboration with regulators.

 

This article first appeared on Moneyweb.

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