Digital Currency – Redefining the Meaning of an Economy

All economic activity takes place within a broader context. Each individual role and transaction is a single cog in a much larger system, and it is this larger system which plays the most significant role in determining what is possible, what value is created and stored, and whether an individual enterprise will succeed or fail. We generally call that larger system within which a transaction takes place, or an enterprise operates, 'an economy'.

Up until very recently there was only one entity around which a sufficiently distinct economic system could be formed for it to warrant being called 'an economy' – the nation state. Thus, Wikipedia1) currently defines an economy like this:

“An economy or economic system consists of the production, distribution or trade, and consumption of limited goods and services by different agents in a given geographical location.”

Although we may talk about the 'black market economy', or the 'internet economy', and whilst these things are indeed systems in their own right, with their own rules and dynamics which play a role in defining the activities taking place within them and determining the success of these activities, they are best thought of as subsystems of 'the' economy – meaning the national economy, which is the main system within which all economic activity takes place.

In our modern world, with its increasing globalization, instant communications with every corner of the planet, digital products, and relatively cheap travel, the continued primacy of geography in determining our main economic systems seems like an anachronism – a hangover from a more primitive past. And indeed, we may be just on the cusp of change to a new method of defining and structuring our main economic systems.

The catalyst for this emerging revolution is, of course, digital currency. To the average user digital currency may seem like just a convenient payment system, a way to avoid heavy charges when sending money overseas, or an exciting investment opportunity; the more profound effects that it could have on our economic structures and systems are not immediately obvious. But in fact, as modern communications technology and increasing digitization of formerly physical products has reduced the importance of physical proximity to economic relationships, currency has emerged as one of the primary agents in drawing together disparate economic activities into a single system, or in other words, in creating 'an economy'.

Of course there are other factors as well. Perhaps the most important is community. This, in fact, is the reason why geography has any importance at all. A business operating in a given area will succeed or fail based on the tastes, wealth, and human resources of the community which inhabits that area. Businesses will succeed if the people of that area have the money to spend on their product, and the necessary talent and skills for the company to draw upon for hiring. Crucially, the success of this economic community is largely tied into its currency. If a currency is devalued through inflation, everybody in that community has less money to spend, whilst if a currency rises in value against other currencies exporters can no longer sell their high-priced goods, and the economy becomes dependent on debt, and on financial services investing in other countries which are still producing things. When money is created through central banks and issued as interest bearing credit lines, interest rates can serve to maintain both of these negative scenarios – internal devaluation through inflation and increasing external valuation through capital influx in the form of loans. It is also currency which serves to tie together members of an economy who do not have any other substantial connections into a single and cohesive economic system.

Today, digital currencies are replacing both of these most important aspects of the nation state. They are clearly currencies, but by virtue of this – and the network effect which ensures that increasing adoption of a digital currency leads to its value increasing - they are also building cohesive economic communities around themselves. Users who share the same currency and the same desire to see it succeed will use businesses which accept that currency and often go even further than that, to talk about and promote those businesses within their social circle. Businesses themselves see each other as not only competitors chasing after spending of the same customers, but also as allies with a common interest in promoting the success of the particular digital currency economy in which they are operating.

Successful businesses using a digital currency raise the value of the economy, enriching their users and other businesses within the same economy, whilst an expanding user base also clearly increases the size and success of the economy.

Both individual users and businesses operating within these new economies find that they are no longer dependent primarily on the national economy in which they operate, but rather, they are dependent on the new digital currency economy which they are helping to create.

Economic Liberation: Escaping a Failing Economy

One of the main effects of this is the opportunity it affords people to escape from the limitations imposed on them by their immediate physical environment – by the economy within which they would otherwise be forced to conduct all of their business. The most obvious example of this would be if a country has high inflation, in which case citizens would have the choice to 'escape' into a less inflationary currency. But it goes much further than this. A person living in a country in recession or with a stagnating economy may, to some extent, be able to escape from this through becoming part of a growing digital currency economy (or make their situation worse by getting involved in a failing economy, of course). A growing digital currency economy, especially one of a smaller size, is more likely to welcome a person's talents for their potential to contribute to the success of their economy, as well as to have money to spend on supporting new economic activity - providing opportunities which that person's geographical economy may not be able to provide.

These effects are, however, currently limited by the fact that products and services are most commonly not priced in the digital currency in question, but rather are priced in another currency such as dollars and then converted at the point of sale. This maintains the connection with the national economy whose currency is used to price the goods.

Some Predictions for the Future

The community and network effects of digital currency seem likely to be stronger (relatively) for a smaller economy. As the digital currency economy grows its users become more diverse and share less in common, reducing cohesion, whilst individual users themselves may have less confidence that their own actions will have any impact on the broader economy and thus act in a more expressly selfish and less communal manner, as their incentive to contribute to the success of the economy is reduced.

For these reasons I personally believe that in the future we will see a broad range of digital currencies flourish, based around specific communities with shared values, shares social and business connections, and shared interests – rather than around a shared location. These micro-economies will ebb and wane, and individual users will straddle between them and switch their assets and efforts according to the opportunities according to their own circumstances and preferences at any given time.

For digital currency as a whole to be truly successful, however, and for it to provide a significant challenge to fiat currency, we will have to reach a stage where goods and services are priced in digital currency. This is the future I see for Bitcoin itself – as the international currency spanning all national and digital economies and providing a common expression of value. Of course we are a long, long way from that now, as a strong degree of stability would be required for this to happen, but it seems to me that Bitcoin is well suited to take on that role eventually - and would certainly receive the support of other digital currency communities in doing so.

Finally, any article on the future of digital currency cannot be complete without noting that many projects are seeking to use the same underlying technology, and build the same kind of community driven micro-economy, around projects which offer more than just a currency. You can read more about these projects in my Devtome article about Bitcoin 2.0

Categories: Economics | E-Currency | Cryptocurrency | Bitcoin

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