“Money, it is conventional to argue, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account which facilitates valuation and calculation; and a store of value which allows economic transactions to be conducted over long periods as well as geographical distances,” writes Harvard historian Niall Ferguson in The Ascent of Money: a Financial History of the World.
For a long time, money was embodied in precious metals like gold and silver. The earliest known gold coins were produced in Lydia, in what is now Western Turkey about 2500 years ago. But, with the introduction of banknotes in seventh-century China, money started to decouple from physical objects with intrinsic value.
“Today . . . we remain more or less content with paper money - not to mention coins that are literally made from junk,” writes Professor Ferguson. “ . . . we are happy with money we cannot even see. Today’s electronic money can be moved from our employer, to our bank account, to our favorite retail outlets without ever physically materializing. It is this virtual money that now dominates what economists call the money supply . . .The intangible character of most money is perhaps the best evidence of its true nature.”
Given this intangible character of money, it is not surprising that major advances in information technologies have in turn led to major advances in the way we deal with money and payments. In the 1960s, 1970s, and 1980s, mainframes, minicomputers, data networks, transaction processing and data bases enabled financial innovations like ATMs and credit cards. Then in the 1990s, the wide adoption of the Internet and World Wide Web led not only to online banking, but paved the way for online shopping and e-commerce in general.
Smart mobile devices, broadband wireless networks, cloud-based services and big data are now ushering the next major phase in the evolution of money and payments. Money is continuing its centuries old transformation from being embodied in objects with intrinsic value, like gold and silver, to being nothing more than information in the digital wallets of our mobile devices as well as in our digital accounts someplace out there in the cloud.
Since just about everyone in the world, rich and poor alike, now has access to mobile devices, this major chapter in the history of money brings with it a universal inclusiveness that has been missing in the previous links between information technologies and money. Mobile digital money is coming, - over time, - to every individual in every corner of the world.
Are we ready for this major step? Not by a long shot. The volumes of payment transactions are likely to go up by a few orders of magnitude over the next decades, but that is arguably the easiest part of the transformation. Money is inexorably linked to identity and trust. Which means that the transition to universal digital money has to be accompanied by a similar transition to universal digital identity management and to digital trust frameworks. These are much, much harder problems, requiring considerable innovation.
For example, the January 14 issue of The Economist has an article on India’s massive Unique ID (UID) initiative, known as Aadhaar. The UID project aims to issue each resident in India a 12-digit unique number, which will be stored in a centralized database and will be linked to basic demographics and biometric information. Among other benefits, Aadhaar will bring financial inclusions to the poor and underprivileged residents of India, enabling them to become integrated into the world’s digital economy, and thus be able to avail themselves of the many services provided by the government and the private sector.
As The Economist points out, “ . . . one massive problem in India is that few poor people can prove who they are. They have no passport, no driving licence, no proof of address. They live in villages where multitudes share the same name. Their lack of an identity excludes them from the modern economy. They cannot open bank accounts, and no one would be so foolish as to lend them money. The government offers them all kinds of welfare, but because they lack an identity, they struggle to lay hands on what they have been promised.”
“For the poor, having a secure online identity alters their relationship with the modern world. No more queueing for hours in a distant town and bribing officials with money you don’t have to obtain paperwork that won’t be recognised if you move to another state looking for work. . . Those to whom the government owes money will soon be able to receive it electronically, either at a bank or at a village shop. . . Armed with the system, India will be able to rethink the nature of its welfare state, cutting back on benefits in kind and market-distorting subsidies, and turning to cash transfers paid directly into the bank accounts of the neediest. Hundreds of millions of the poor must open bank accounts, which is all to the good, because it will bind them into the modern economy. . .Vouchers for medical or education spending could follow.”
“Companies - and their customers - stand to gain from the system too. . . Banks will be more likely to lend money to people they can trace. Mobile-phone firms will extend credit. Insurers will offer lower rates, because they will know more about the person they are covering. Medical records will become portable, as will school records. Ordinary Indians will find it easier to buy and sell things online, . . .”
Given the considerable benefits of financial inclusiveness to individuals, governments and business, we can expect similar digital identity projects in emerging economies around the world, as well as in the more advanced economies, where a significant portion of residents remain barely connected to their financial systems. But, as we so well know, along with the benefits of digital identities will come massive issues, including many schemes to steal those identities for criminal purposes. Thus, to be effective, universal digital money has to be accompanied by major innovations to securely identify individuals as they conduct transactions through their mobile devices.
The relationship between information and money is now closer than ever. Not only is money increasingly represented by information, but information about money is becoming a form of money. Walter Wriston, chairman and CEO of Citibank from 1967 to 1984, - widely regarded as one of the most influential bankers of his generation, - famously said: Information about money has become almost as important as money itself. I think we can now update his remark to read: Information about money is money.
This point was well articulated in a recent report by the World Economic Forum - Personal Data: the Emergence of a New Asset Class. The report states in its introduction:
“We are moving towards a Web of the world in which mobile communications, social technologies and sensors are connecting people, the Internet and the physical world into one interconnected network. Data records are collected on who we are, who we know, where we are, where we have been and where we plan to go. Mining and analysing this data give us the ability to understand and even predict where humans focus their attention and activity at the individual, group and global level.”
“This personal data - digital data created by and about people - is generating a new wave of opportunity for economic and societal value creation. The types, quantity and value of personal data being collected are vast: our profiles and demographic data from bank accounts to medical records to employment data. Our Web searches and sites visited, including our likes and dislikes and purchase histories. Our tweets, texts, emails, phone calls, photos and videos as well as the coordinates of our real-world locations. The list continues to grow.”
“Firms collect and use this data to support individualised service-delivery business models that can be monetised. Governments employ personal data to provide critical public services more efficiently and effectively. Researchers accelerate the development of new drugs and treatment protocols. End users benefit from free, personalised consumer experiences such as Internet search, social networking or buying recommendations.”
“And that is just the beginning. Increasing the control that individuals have over the manner in which their personal data is collected, managed and shared will spur a host of new services and applications. As some put it, personal data will be the new “oil” – a valuable resource of the 21st century. It will emerge as a new asset class touching all aspects of society.”
We are going through an information revolution that is impacting just about everything around us, including the very nature of money, identity and trust. Given the central role that money plays in human societies and in our personal lives, and the major advances that continue to take place in the world of information technologies, the evolution towards a universal, digital money ecosystem promises to be one of our most exciting transformational initiatives in the decades ahead.
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