The future of money and payments

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.

It wasn’t until Valentine’s Day in 1961 that the Sarb created and put into circulation the first rand.

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.

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.

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.

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.