Of seashells, gold and virtual currencies: why is it taking so long for Bitcoin and the like to become established?
At the start of this year, Deutsche Bank CEO John Cryan made headlines with his assertion that cash is expensive and inefficient. Does this mean the time has finally come for a digital currency? Bernd Kohl (Executive Director, GFT) and Dr Patrik Pohl (Managing Director, Deutsche Bank) gave a talk at the new.New Festival on so-called virtual currencies. It was an opportunity for both to take a closer look at the money many have grown so fond of. And they’ve summarised their thoughts in this interview.
Your talk at the new.New Festival in September started with stones and seashells to remind people of the basic functions of money. How should we interpret that description?
Pohl: Money serves some basic functions. It’s a bartering mechanism and a means of keeping hold of something with value. It also simplifies the exchange of goods. Instead of trading wheat for services, an exchange can take place in the form of money. Money is also a means of storing assets – it doesn’t ‘go off’. Things don’t have to be purchased and sold at the same time.
Stones and seashells were the first things used for exchange, later gold became the primary means for this. These days what most people associate with money is paper money and coins or money deposited somewhere on an account for issuing by the bank. Unlike with gold, we refer to this as ‘fiat money’ – trusting in the value of the paper.
Kohl: Beyond this, money not only comes in various forms but it also serves different purposes. In addition to its basic feature as a means of exchange it also has a payment and interest function. If we talk about a currency when referring to money, we generally mean a specific area: it is the legally established means of payment in a particular country.
Do digital currencies even count as money?
Pohl: When we talk about virtual currencies, we come back to the original function of money as a means of exchange. They differ from state-run means of payment, since they were not created by a central bank and don’t have to be connected to a state-run currency. To this extent, the idea is to put your trust in a technical solution that operates through networks (ie, bitcoins) rather than through a central bank.
Kohl: Looked at in these terms, VCs are an extension of money. The various forms exist in order to cover various needs and interests. But whatever the form money takes it only becomes truly established if it’s easy to handle. If I’m at a cash register and want to pay with anything other than cash then of course the technical infrastructure has to be in place. But for the most part, currencies have to make transactions smooth and easy to carry out. If I still haven’t paid for my purchases after 5 minutes, the person queuing up behind me would have every reason to complain and I’d be pretty annoyed myself.
In other words it’s just not easy enough yet to work with virtual currencies?
Pohl: I believe it’s too early to tell. We’re seeing several central banks dabbling with digital technology to issue money. The concept of the ‘Fedcoin’ is one example. Here the US central bank could potentially issue Fedcoins as the legal tender with parity to the conventional dollar.
Kohl: Cultural factors also play a big role here. In ancient Egypt, everything that had anything to do with money depended on the Nile: even the tax system was based on the water levels of the river, because that determined how wealthy the farmers would be in the coming seasons. Here in Germany, cash is still extremely popular and respected. Incidentally, Germany isn’t as unique in this respect as reports might lead you to believe. When the Greeks could no longer withdraw cash in the summer of 2015 following the national crisis, this could have been the defining moment for digital currencies such as bitcoins! But it wasn’t: because retailers don’t accept anything other than cash.
So what exactly has to happen in order for digital currencies to become established?
Pohl: The way I see it, digital currencies will only become accepted when we start to trust in their ability to retain value. Without the protection of a central bank or some other state-run institution, I think this makes it difficult for digital currencies. At the end of the day people have to pay taxes in their domestic currency, so getting paid in something like bitcoins is risky. And there are other open legal and regulatory issues that still have to be addressed: how do we prevent money laundering and tax evasion given the anonymity of bitcoins?
Kohl: So the right basis has to be created first for an abstract currency like bitcoins. Let’s remember the Egyptians – important questions have to be answered regarding the form money can take and this strongly influences our society: what types of investments might there be for digital currencies? What exactly will happen with the interest function of the money? That being said, banks could start trading in currencies like bitcoins. This wouldn’t completely clear the way, but it would be a first step in establishing bitcoins as a viable means of payment.
Dr Pohl, Mr Kohl, thanks so much for the interview!