From Warren Buffett to Jamie Dimon to the government of China, some of the largest financial entities in the world are discussing cryptocurrency. While many are opposed, there is also a large contingent that recognizes we are in the midst of some seismic global changes, most notably Ray Dalio’s assertion of the Changing World Order.

We rarely refer to it as a “technology”, but it has consistently evolved throughout history to meet our economic needs. Whereas hunter-gatherer societies generally viewed resources as belonging to everyone, step-changes like the introduction of agriculture significantly complicated economies. Agriculture led to less nomadic communities with greater food stability and increased free time to build, giving way to specialization and the foundation of our modern economy.

As early as 6,000 BCE, humans leaned on bartering for goods such as bushels of wheat or cattle. Determining the conversion rate of cattle to wheat, jewelry, etc. can be both complex & ambiguous. As cities expanded, the increase in economic activity intensified this complexity. By 3,000 BCE, cities in Mesopotamia began accepting barley as a common measure of value. Temples would accept barley and tally the contributions on a tablet. The contributions would then be returned with clay tokens which could be used to pay debts at the temple.

Barley was a logical first currency because it had intrinsic value, so people trusted it. As a result, the early use of barley created the two most basic forms of money:

1. A medium of exchange.

2. A unit of account.

Using barley and other commodities like cattle and silver as currency drastically increased economic activity, but it had limitations. For example, barley, cattle, and silver all have different denominators, so exchange rates were highly variable. They are also physically intensive to transport.

The next step-change occurred in 630 BCE when King Croesus in the Anatolian Kingdom of Lydia created the first known metal coin. This invention dramatically accelerated economies because the metal only had to be weighed and imprinted once, was easy to transport, and was controlled by a centralized authority, instilling trust. Transactions increased, and economies accelerated rapidly.

While Lydia is credited with creating the first coin, it was not the only one for long. Early coinage was still linked to the intrinsic value of a coin’s metal, but large empires like Ancient Greece adopted and established trust in a core currency. The Roman Empire would continue to evolve coins, expanding the scale of a common currency. The significant weight of metals had obvious limitations. For most day-to-day use cases, this weight was not an issue, but transferring large payments long distances was still prohibitive.

As a result, merchants in China (~1,000 AD) began creating paper notes as a substitute. Initially, the Chinese government allowed a few certified merchants to create paper notes, but ultimately, the government decided to control production, creating the first government-controlled paper currency.

This paper innovation fully decoupled money from weight constraints and intrinsic value. In describing it to Europe, Marco Polo wrote:

“With these pieces of paper they can buy anything and pay for anything. And I can tell you that the papers that reckon as ten bezants do not weigh one.”

Europeans were still resistant to the concept of paper money, so progress on decoupling money from weight and intrinsic value slowed. Printed money did not arrive in Europe until the 17th century, when the Bank of Stockholm issued the first bank notes.

The creation of paper money in Europe was prompted by distrust. New coins had lower weight than old coins (and therefore lower intrinsic value), so people began requesting the old coins. This started a bank run; so out of necessity, the Bank of Stockholm issued paper notes!

In parallel to this evolution to paper notes, finance was also experiencing a new step-change: the rise of interest. The breakthrough came in the 15th century, with the massive shift from Roman to Arabic Numerals. This enabled a much more dynamic, scalable financial system, creating new opportunities like charging interest. Out with the abacus; in with modern accounting.

Charging interest created a whole new world of financial engineering. It was originally frowned upon by the Catholic Church. Both the Council of Nicaea (325 AD) and Council of Vienne (1311 AD) forbade usury (charging interest). Even in 1600 AD, the Westminster Confession of Faith condemned interest. Still, interest and lending remained lucrative and led to the rise of large, centralized banks, including the famed Medici Family Bank of Italy.

When the Medicis moved to Florence, they accrued a significant fortune through commerce & banking. Their wealth and control over the money flow positioned them as a centerpiece in Italy for roughly three centuries, and their patronage was a key factor in the success of the Renaissance.

Economic growth led to expanding empires and necessitated the first global currency: the Spanish Dollar. As the first global currency, it solidified the trust of multiple nations in a centralized currency.

Since the 18th century, the world has operated on a global currency. In 1944, the Bretton Woods Agreement switched that currency from the British Pound to the US Dollar. The economic tension created from the Treaty of Versailles was seen as a large contributor to the rise of political tensions and World War II (WWII). The Bretton Woods Agreement sought stability by pegging foreign exchanges to the US Dollar and pegged the US Dollar to gold.

Today, money has fully separated from intrinsic, constituted value. Coins like pennies, nickels, etc. are not solely associated with the value of their metal contents. The US money supply is not backed by gold.

In the 1960s, the US ran consistent deficits, leading to what is known as the “Triffin Dilemma.” Increasing international deficits. Rising domestic inflation. The US financial system felt pressure, and the global receivables far outpaced the balance of US gold. The world feared a run on gold (similar to a bank run), and ultimately, Nixon was forced to end the practice of pegging the US Dollar to gold in 1971.

Computers introduced another step-change in finance, accelerating the speed of transactions, size of money supply, and increasing complexity with margin trading, mortgage-backed bonds, etc. Money supply and infrastructure has subsequently adapted to meet our increasingly complex needs.

Today, the world of finance is facing a new series of challenges. Inflation in the US. Increasing deficits internationally. The rise of China. These large global cycles have brought our financial system to a crossroads, and it is fairly logical to believe that currency will evolve to better facilitate the new world economy. One potential solution has been rising: cryptocurrency.
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Since the beginning of 2020, the total market cap of cryptocurrencies has multiplied by ~4x to ~$800B. At one point, the value eclipsed $2T. There are several different postures on cryptocurrencies. Some love it. Some hate it. Some are loyal to one token. Some believe in all.

Regardless of where one falls on the cryptocurrency spectrum, it is impossible to ignore an asset that eclipsed $2T in value. And at its core, it is very possible that cryptocurrency is the next step-change in money’s long history as an evolving technology. A fully digital-native technology that is designed for a global, decentralized economy, rather than a highly-variable money supply regulated & manipulated by the whims of a centralized government.

While it is impossible to fully know the state of money years from now, it is fairly clear the world is changing, and with it, the demands of finance are changing. The new world of finance requires ubiquity, accessibility, trust, and independence.

Between companies increasingly willing to hire remote and more individuals participating in the global economy than ever before, a common currency will be critical. From 2014 to 2018, 300M+ new users in India gained internet access. From 2019 to 2050, the International Finance Corporation expects 1B+ Africans to come online. This is estimated to increase Africa's internet economy by $500B+. As mentioned, the US Dollar has served that universal function for almost a century. But the weight of global commerce has changed.

When we look at global trade dependencies, the US was the clear central cog in the 1960s. The US Dollar was the natural fit for the global currency. The trade landscape, however, looks very different 50-60 years later. There are two major changes:

1. There are more countries participating in the financial system.

2. There’s been a shift of weight away from the US as a financial hub.

This trend has been ongoing for years. In Ray Dalio’s book, Principles for Dealing With The Changing World Order, he describes China’s meteoric rise over the past ~50 years. Since 1949, China has seen a 44x increase in real GDP per capita while the US has only increased by ~9-10x!

The increased digital transformation will continue to accelerate both trends, pressuring the reliance on the US Dollar.

Increasing market complexity poses a challenge for the traditional financial system due to different currencies, time zones, working styles, and payment plans. These factors make for a complicated global financial system.

Our current financial infrastructure is not set up to be completely accessible to people. Roughly 2B people globally and ~25% of Americans are unbanked or underbanked.

Even if you do have access to a bank, traditional financial institutions have limits. Today, banks use the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network to make international transfers. SWIFT was created in 1973 as an interbank protocol. SWIFT does not actually transfer money, but rather is more of a messaging service.

11,000 financial institutions use SWIFT. When a SWIFT wire is initiated, it is passed through banks. But if certain banks do not have a direct agreement, the transfer is facilitated by multiple banks.
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For example, say you are an American immigrant, and you want to send money home to Brazil. You deposit money in a bank in America. Then you initiate a transfer to a bank in Brazil. If those banks do not have a direct connection, then it gets passed and processed through multiple other banks.

Each transfer is subject to fees and constraints like business hours and fraud prevention, making the process highly inefficient. Bank-to-bank transfers can take up to three business days, and international transfers take up to five business days!

This inefficiency is largely because our current financial infrastructure is not digitally-native. Rather than projecting our existing system into a digital setting, a digitally native approach would mean building a new digital version using first principles. Digital projections of traditional tools and infrastructure are certainly advanced, but they still maintain the same accessibility barriers and points-of-failure.

A few examples of problems with the physical world version of the financial system:

• Money transfers
  ‍3-5 business days for transfers (e.g. Venmo to Bank of America) and dependency on SWIFT

• Delayed deposits
  ‍Deposited checks often need 24+ hour windows to validate funds

• Middlemen inefficiencies
  Processes require multiple verifications, reducing privacy and increasing delays. If transactions are not validated, it may take days to know

“[Money] is trust inscribed, and it doesn't matter what it is inscribed on.”

—Niall Ferguson

Money functions as a technology as long as people have trust in it. Since we separated money from physical, intrinsic value, money is merely an entity that society believes has value. Something that can be accepted as payment, and at a later time, can be used to purchase goods & services.

Trust in money has progressed over time. With barley, people knew their money would prevent them from starving should they not be able to actually use it as currency. Over time, the benefits of a common currency were evident, and trust in it increased. For the past one hundred years, we have placed that trust in large financial organizations and the US government.

Trust in the US currency is extremely important. Trading with the United States is a necessity to participate in the global economy. The dollar is still estimated to be used internationally 2-3x more than the euro, and it is used ~35x more than the Chinese renminbi. But usage may be a lagging indicator. Global economies take decades for large trends to unfold, and in the past ten years, the renminbi has increased 21x in the international index.

This trend will probably continue, and our international exchanges will continue to fragment. If we trend towards a fragmented market, then individuals will need to make a decision on which government currency they trust.

Individuals could defer to their country’s political alignment (e.g. US allies defer to US Dollars), but public trust in government institutions ranges widely across the globe. In many countries (the US included), trust has been declining over the years.

The trends are even worse when we look at local trust in financial institutions. In many countries, only roughly half of those surveyed actually trust their financial institutions, and this trust is also declining.

Looking forward, the trend away from the US Dollar will continue to strain trust on local governments and financial institutions, both of which are declining. Financial security is only as durable as the weakest link in the chain. It requires trust in the government, financial institution, and the economy. If one fails, they all fail.

Mistrust in local governments and financial institutions may be largely warranted. The Great Recession of 2008 rattled trust in banks in the US, and there are many global examples of countries’ poor economic policy leading to runaway inflation.

Most recently in Venezuela and Turkey, runaway inflation has wiped away economic opportunity for millions. For context, these countries’ “low” years of ~12% are still nominally higher than the alarming inflation in the US in 2022.

Beyond fiscal policy itself, national ideologies also have global financial implications. In the wake of the Russian attack on Ukraine, the Russian economy was de-platformed from SWIFT. Overnight, Russian citizens had their entire financial security threatened. Removing an entire country’s access to the financial system and removing their reserves threatens the US Dollar’s role as the global reserve currency.

Depending on your stance politically, you may or may not trust a specific global currency (e.g. US or China). As a result, it will be increasingly critical to have an independent currency unattached to the whims of a political system or ideology.

In summary, our current concept of money is being challenged:

• Increased globalization & fragmentation of our international economy demands a completely ubiquitous currency

• Current limitations in our financial institution constrain accessibility

• Macro-economic trends are driving increased fragmentation in global currencies while simultaneously challenging our trust in governments and financial institutions

• Recent events have displayed both the desire and need for a currency completely independent of a single organization

We know that history supports the long-term evolution of money as a technology to facilitate economic advancement. So why is now any different?

It may not be. And when you look at the converging macro factors, cryptocurrency makes a lot of logical sense as the next evolution. Decentralized, open-source cryptocurrencies represent a ubiquitous, digitally-native currency independent of government competency and ideology.

To the older generations, this may sound far fetched, but consider the younger generations. Gamers in the metaverse. Hackers building software. Working in India for a company in the United States. Making best friends with people from countries away because their avatars were similar. These are the people building the next-generation system.

Cryptocurrency is the logical next-step solution, and the adoption of cryptocurrency will create step-changes in innovation that will accelerate digital transformation, and enable the world that the next-generation is building, including examples like:

• Separation of physical and digital identities
  ‍Anonymous social usernames, avatars to mask physical appearance, fully pseudonymous economy

• Automated protocols
  Pre-set monetary policy and auditable algorithmic processes

• Smart contracts
  Automating contracts like legal, real estate, etc

• Digital rights
  Scaled, enforced ownership across digital platforms

• Less or no middleman
  More fair and transparent exchange, much lower cost

Until now, cryptocurrency has prompted both skepticism and short-term resistance. This is a normal human response to technological change. The printing press, school system, computers, and phones all had skeptics. Calestous Juma’s book, Innovation and Its Enemies, highlights:

“Resistance to new technologies is heightened when the public perceives that the benefits of new technologies will only accrue to a small section of society, while the risks are likely to be widespread.”

Crypto has thus far only impacted a small portion of the world. But when you consider historical examples and forward-looking trends, its use cases & positive impacts are continuing to grow. As a result, cryptocurrency seems more like a logical inevitability than an imaginary, opportunistic trend. As for which cryptocurrency will win, only time will tell.