Trust In Money
Achieving Digital Scarcity
A scarce commodity is something that has a limited supply. It isn’t easy to
create, copy, or otherwise access. That is why digital money, as cryptocurrency, isn’t a file you
keep on your hard drive. That would be impractical as anyone with a computer would then be able to
just infinitely copy it around.
Instead, all forms of digital currency - both fiat and crypto - rely on an
accounting system based on digital ledgers. A ledger being an organised record of debits and credits
against account holders, providing a running balance.
The Problem Of Trust In Digital Money
We must trust that the public institutions will behave
in everyone’s best interest, and by doing so we grant them the authority and control over the money
system. Even if this centralised system works most of the time, it still has a few noticeable
weaknesses. For example, while your money is legally yours, it’s never really under your custody.
A single central point of failure is more vulnerable
to corruption, manipulation, or plain old external pressure. This leaves the door open to abuse,
mismanagement, and economic exclusion. However, sticking to our central theme, the most worrying
side
effect of fiat money - money based only on institutional trust - is how it undermines scarcity.
Growing Money Supply
As more value is created via economic activity, new
money must be introduced in the system so that the economy can continue to flow.
Grossly oversimplifying, new fiat money is created by
Commercial Banks. The extent to which they create new money is rationed by the Central Bank. These
are
common ways: Providing credit, like loans to a new customer that become deposits,
buying existing assets which again become deposits,
providing overdraft facilities, which are deposits that can be spent.
Achieving Digital Scarcity
A scarce commodity is something that has a limited supply. It isn’t easy to create, copy, or otherwise access. That is why digital money, as cryptocurrency, isn’t a file you keep on your hard drive. That would be impractical as anyone with a computer would then be able to just infinitely copy it around.
Instead, all forms of digital currency - both fiat and crypto - rely on an accounting system based on digital ledgers. A ledger being an organised record of debits and credits against account holders, providing a running balance.
The Problem Of Trust In Digital Money
We must trust that the public institutions will behave in everyone’s best interest, and by doing so we grant them the authority and control over the money system. Even if this centralised system works most of the time, it still has a few noticeable weaknesses. For example, while your money is legally yours, it’s never really under your custody.
A single central point of failure is more vulnerable to corruption, manipulation, or plain old external pressure. This leaves the door open to abuse, mismanagement, and economic exclusion. However, sticking to our central theme, the most worrying side effect of fiat money - money based only on institutional trust - is how it undermines scarcity.
Growing Money Supply
As more value is created via economic activity, new money must be introduced in the system so that the economy can continue to flow.
Grossly oversimplifying, new fiat money is created by Commercial Banks. The extent to which they create new money is rationed by the Central Bank. These are common ways: Providing credit, like loans to a new customer that become deposits, buying existing assets which again become deposits, providing overdraft facilities, which are deposits that can be spent.