The recent spurt of attention given to Bitcoin in the media, sent me on an exploration of the subject of currency. What follows is a short story of currency as I see it.
In the beginning there was just Barter. When an individual A got interested in a thing X owned by individual B who in turn was interested in Y owned by A. It was just a simple matter of exchanging stuff X and Y to complete the business transaction. Barter has another variant where m times X of things are transferred for n time Y things in return. With the passage of time Barter fell out of vogue. The Barter system is inherently simple but the transaction can be cumbersome if the parties involved are not able to reach agreement.
What followed next was the use of precious metal such as Gold, Silver and Copper in fixing up the value of the sale item. Precious metal such as gold bars were increasingly used in all transactions. This practice made the business transactions more palatable and common place. With the passing of time, metal bars made way for metal coins which were officially released by the nations involved giving rise to the term legal tender. Two important characteristics were embossed on the coins namely the authority (a nation) releasing it and the value associated with the coin. The practice of using coins caught on and the impact it had on business transactions can only be imagined. Suffice to say that the common people were increasingly involved in the business transactions. The reign of metal coins in the field of business is rather long.
Eons later the metal coins were found to be bulky and there was a shortage of metal supply. Both these factors led to the appearance of paper currency. Paper currency backed up by metal was increasingly used in business transactions. People were happy since paper currency was easy to handle and large values could be easily assigned to these as opposed to coins. Paper currency has enjoyed a long career as legal tender because of these advantages. However with the progression of time, the following two disadvantages were noticed; paper currencies easily wear out and they can be counterfeited or duplicated (not endorsed by authority). The currency eras from Barter to Coins to Paper can be viewed as the Classic age of currency. Here the domain of currency is confined to national borders. Financial institutions such as banks sprung up which are involved in the day to day running of business transactions.Paper currency is commonly referred to as Cash.
The disadvantages associated with the paper currency led to the development of plastic money namely the Debit cards and Credit cards. These are issued by financial institutions such as banks and the transfer or exchange of money happens behind the scene. At the time of writing cards are extremely popular. This era can be referred to as the modern age of currency where the computers are increasingly used in the day to day running of business transactions.
There are also other forms of currency such as Promissory notes and Coupons which have been used sporadically especially in financially troubled times.The currencies discussed so far can be classified as Mainstream currencies.
There is another large group of currencies that fall under the category of Alternate currencies which don't enjoy the backing of nations or international financial institutions. Usually a group of individuals get together and run these exchanges. Legal tender flows in and out of these exchanges. Trading within the confines of alternate currency does not involve conversions to legal currency. Digital currencies such as Bitcoin fall under this category. The list of currencies falling under the alternate category is just infinite and endless. Brownie points, IPCoin and LETS are just a few examples of this kind of currency.
So what exactly is Bitcoin? Bitcoin is a software-based online payment system introduced as open-source software. Payments are recorded in a public ledger. Payments work peer-to-peer without a central repository. Also goes by the name of virtual currency, cryptocurrency or digital currency.
What kind of future do alternate currencies have? Hard to tell. But without getting into the taxonomy of currencies, one can say that the field of currencies definitely needs a boost. Methods which are time tested are followed by financial institutions who are normally reluctant or hesitant towards change.
As we ride into the next millenium let us also take the currency on the ride. I feel computers can do a lot more in modernizing currency than just supporting the practices of the past. A solution that is built on Smart Cards and uses secure practices at the core of every transaction is definitely needed. Let us all embrace technology and say a happy goodbye to the business practices of the past which have not kept up with the times.
