The wheels of monetary freedom are turning

March 21, 2013 § 8 Comments

Photo by Flickr user Images_of_Money
Photo by Flickr user Images_of_Money

Monetary transactions truly permeate modern human society. For this reason, some recent events on the payments scene are noteworthy.

Event 1: Some (crazy?) Canadian has offered to sell his house for bitcoins. Bitcoin (BTC) is a decentralized digital currency, meaning there is no central bank issuing or controlling it. For a central government, it’s like a new kind of digital cash that they have no control over. A nightmare — how could you track and collect taxes on transactions that are anonymous (mostly) and don’t pass through regulated banks? It seems BTC haven’t been used for much else than gambling and illegal goods until recently, but things seem to be changing. The odd risk-taker is one thing, WordPress accepting bitcoins as payment quite another.

Event 2: I would argue that this is the more interesting event. Once upon a time, there was an idea called Ripple, promising a smart way of creating and handling community credit. Years passed but the system was never quite developed. At some point, a small group of people took over the name and started developing and implementing the ideas. In February or March 2013, a beta version was launched, and if I were less careful I might have gone so far as to call this revolutionary.

I’ll explain briefly, but here’s an excellent article explaining Ripple and the historical system Bills of Exchange in more detail. In short, Ripple is (or will be when it’s out of Beta) a decentralized payment system that enables anybody to issue currency (already existing or new), a form of IOUs. If I issue some USD in Ripple, they represent a promise to redeem them when the holder so wishes. I would only be able to send my home-issued USD to someone who trusts me for at least the value I want to send. In practice, people will mostly trade with currency issued by so-called gateways, which act like banks. Like banks, they accept deposits and then something representing the money you deposited shows up in your account. You can then trade with anybody who trusts the bank that issued the currency on your account, or anybody that is indirectly connected to the currency issuer via the trust of others. This way there’s no need to extend trust to people that you don’t know and wouldn’t trust in real life.

Ripple has some qualities in common with Bitcoin but goes further than just acting as a currency. Any currency can be handled and issued. The usefulness of Ripple will depend on widespread adoption, which in turn will depend on serious gateways/banks starting to work with it, and that requires compliance with local and international regulations. There are already gateways, but only two. Where will this lead — is the future of banking decentralized?


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