Are we witnessing the evolution of money?

Maya graduated with a BA Hons in Political Science from the University of Nottingham, before studying Law and earning a LLB Hons. She worked at the Houses of Parliament and ICC in The Hague, then moved into Finance and Asset Management, working in New York and Dublin. Before joining Luno to manage the UK and Ireland, she launched her own tech startup in the consumer on demand space. She is a true Bitcoin enthusiast and is ready to empower consumers and businesses and build a more inclusive financial system.

If you’ve looked closely at a £20 banknote lately, you may have noticed something strange. In small letters, just below the words “Bank of England” it will say: “ I promise to pay the bearer on demand the sum of twenty pounds .”

What does that really mean? If you think about it, that doesn’t make much sense. When you pay someone £20 in cash, the note itself is the payment – it’s not an IOU note. If you go to a bank and ask them to fulfill that promise, they’ll simply give you another banknote.

Evolution sometimes leaves behind features that were once useful but no longer serve a purpose. That statement on a banknote is a bit like that, and it’s an excellent place to start when we think about the evolution of money.

A (very, very) brief history of money

The history of money – a medium of exchange, unit of account, and store of value – is far too vast and complicated to explain in a textbook, let alone a single article. Money developed at different times and in different ways all over the world. But we all intuitively understand why this system of debits and credits evolved in the first place.

Commodity currency

It’s very challenging for one person or family to be self-sustaining and meet all their own needs for food, water, clothing, shelter, warmth, and so on. Division of labour solves this problem. One of our greatest strengths as humans is our unrivaled ability to form groups, split tasks based on who does what best, then trade between ourselves.

The downside is that goods and services require variable amounts of time, effort, materials, and other resources. You probably wouldn’t want to trade a cow for a loaf of bread, for example.

Hence the need for a shared system that transfers value between people: money. Early currencies were often commodities like animals, salt, or textiles. These were better than barter, but still not perfect. Precious metals (mainly gold and silver) were the next step in the evolution of money.

Representative currency

Precious metals are still quite impractical: they’re heavy to carry around and can get stolen. So representative currency gradually took over.

Representative currency is essentially a receipt for precious metal. Made from inexpensive materials like paper, it represents a set value in precious metal and is issued by a centralised authority that stores the corresponding metal. The currency itself has no intrinsic value, it just represents something that does.

The Bank of England was first to release notes designed to stay in circulation, rather than temporary receipts. It opened in 1694 to finance King William III’s war against France, accepting gold deposits and issuing notes in return. Anyone who held a banknote could redeem it for the corresponding amount of precious metal. Originally, the Bank of England issued handwritten, signed notes denoting the precise value of a deposit. But they eventually started issuing fixed value notes.

So, the words “ I promise to pay the bearer on demand the sum of twenty pounds ” on a £20 note once meant that note represented £20 worth of gold. But that’s not true anymore. It’s from the time before money evolved to its current stage.

Fiat currency

Fiat currency is what you have in your wallet or bank account right now. It’s no longer backed by precious metal and has no intrinsic value. Banks realised people weren’t returning to collect their gold because banknotes were far more practical.

The value of fiat currency is based entirely on perception. As long as we believe it has value, it does. But that also means it’s inherently fragile, a house of cards liable to topple in the right circumstances.

Fiat currency – and the surrounding financial system – evolved during a non-digital age. It’s inevitable that money will evolve again. Except, the next step is likely to be something new and adapted for the modern age, not a simple modification of fiat currency.

The next step in the evolution of money

Money has always changed to suit the needs of an ever-shifting world. Decentralised cryptocurrencies represent the next step in the evolution of money. We now have a technology with the potential to make our financial system cheaper, faster, safer, more private and yet transparent, and fairer.

Is it possible for decentralised cryptocurrencies to replace fiat? In theory, yes. Money is not about particular materials or designs or anything like that. To work as a currency, something needs to be:

● Divisible — e.g. a pound divides into pence
● Scarce- e.g. the supply of gold is limited by the amount we can mine
● Durable- e.g. modern banknotes are waterproof
● Transferable – e.g. you hand someone a banknote and it’s theirs
● Fungible – e.g. any £1 coin has the same payment value as any other.

Regardless of what it is, if it has those features and people agree on its value, it can work as a currency.

Cryptocurrencies have those features, in addition to being better adapted to the modern world. Although there’s lots of ongoing innovation in the space , Bitcoin has proven its inherent network effects. The earlier someone got involved with Bitcoin, the more they stood to profit. This created (and continues to create) a powerful incentive to start using it and grow the network. Unlike other new payment systems, this is happening naturally.

It also ticks all the right boxes as a currency. It’s divisible into units as small as one hundred millionths. The total supply is limited to 21 million which creates scarcity. Being digital, it’s durable and can’t wear out. It’s also simple to exchange between anyone, and all individual units are interchangeable.

Cryptocurrencies remain controversial because they’re new and entirely unlike the old system. But if you stay open-minded and look back at the evolution of money, it’s clear that things are going to change. The only question is how and when. People have always moved towards whatever system made the most sense at that point – and we now have a new system that’s built for the digital age.


Interested in hearing leading global brands discuss subjects like this in person? Find out more at the Blockchain Expo World Series, Global, Europe and North America.


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