My forward to Deloitte’s second report on digital money - The future of exchanging value: Cryptocurrencies and the trust economy.
Ice becomes water when warmed. Only familiarity prevents us from marvelling at the mysteriousness of this ‘phase change’, as physicists call it. Nevertheless, we’ve witnessed a similar phase change as the physical hardware that delivered the phone network was repurposed to also deliver a new network – the internet.
And where the phone network depended on point-to-point connections, the internet connects people via packets of information that travel through cyberspace until they arrive at their address.
Initially, the old ‘connect first’ phone network was monopolistically competitive. The upshot of that market structure has produced all manner of frustrations and complexities such as incomprehensible pricing structures and prices way above cost for peripheral services such as texting and international roaming. However, all this is different on the net because of the different market structure produced when each node in the network helps out – redirecting digital packets in return for reciprocal help from other nodes.
Thus, all the transaction costs of the old network melt away. If you have a great product – such as Google, Wikipedia, Salesforce or Xero – you can just put it on the net and it’s there for everyone. And we’ve watched on as this miracle has unfolded, just as astounded as if we were watching ice melt for the first time.
This analogy helps us understand the potential costs of a financial system that looks like the phone system – with complex terms, price gouging, etc. For me to exchange value with, say, an American airline, I’ll pay about 2 per cent commission to a bank to facilitate the cross-currency transaction. That amount vastly exceeds the bank’s cost. Large corporates get the same service for a 20th of that margin!
So the hunt is on for the ‘internet of money’ – a technology and overarching architecture to displace the oligopolistic position of the too-big-to-fail banks. Continue reading