Before one can understand and appreciate the evolution of Bitcoin and cryptocurrency, one needs to look at the history of money, monetary systems, innovations, and the issues they faced as money. This blog post looks at The Barter System, The Bretton Woods Agreement, the influence of former president Nixon on fiat money, central and local banks, the SWIFT system, centralised vs decentralised and Fiat Money vs Bitcoin and cryptocurrency.

The Barter System

Money, in its simplest terms, is anything that is commonly accepted by a group of people, used to exchange goods, services and resources for other goods, services and resources.

Very early in the evolution of mankind, people needed things such as food, clothing, and tools to survive. People figured out that they could trade one thing for another. People also figured out they could trade services. Thus, the Barter System was born. People bartered goods such as food, spices, tea, silks for other things such as salt, furs, crafts, livestock.

The Barter System dates to 9000 – 6000 Before Christ (B.C). The oldest form of money was cattle, such as cows, camels, goats, and other animals. People traded, for example, two goats for one cow. Cows had more value than goats. Routes over land and sea opened in the years to come.

600 B.C. the first official currency was minted in King Alyattes of Lydia, today known as West Turkey. The coins were made from electrum, a natural mixture of gold and silver. The coins were stamped with pictures (snakes, animals, reptiles) to note the different values denominations.

The Chinese was the first to transition from coins to paper money.

The Barter System allowed for an increase in spend at which business could be conducted. It was flexible and items could be exchanged for completely different type of items. One could keep your goods and trade services instead. However, there was no standardised rate of exchange and values were negotiated. Trust was an issue. There was no proof or certification of legitimacy. It offered no consumer protection or warranties (Akademie, K., 2022).

Bretton Woods Agreement

Governments of every nation had to come together to discuss and agree on important monetary policies and agreements. The Bretton Woods Agreement is one of such agreements.

It was negotiated at the United Nations Monetary and Financial Conference held in Bretton Woods in 1944 by delegates from 44 countries. British economist John Maynard Keynes and American Chief International Economist of the U.S. Treasury Dept. Harry Decker White were the primary designers of the system. The agreement created an efficient foreign exchange system that prevented competitive devaluations of currencies and promoted international economic growth. Two important organisations got created out of the agreement: The International Monetary Fund (IMF) and the World Bank. In 1958 the system became fully functional and called for the USD to be tied to the value of gold. All other currencies were then tied to the value of the USD. The exchange rate applied at the time was a set price of $35 per ounce.

This system allowed for significant expansion of international trade and investment. However, the money supply increased which created a decline in purchasing power. The U.S. dept increased and other member countries were not willing to accept high inflation rates. This resulted in a lack of trust and destabilising speculations.

In 1971, U.S. president Richard Nixon announced the temporary suspension of the dollar’s convertibility into gold. The USD struggled within the parity established at Bretton Woods. In March 1973, the par value system was abandoned. Member countries then agreed on permitting different kinds of ways for determining the value of a nation’s money. Even though the Bretton Woods Agreement collapsed, the IMF and World Bank remains today (Akademie, K., 2022).

Nixon, the Path to Fiat

Shortly after Nixon announced the temporary suspension of the USD’s convertibility into gold, due to various increasing problems, President Nixon decided to break up the Bretton Woods System and sell the idea of fiat money. This, however, led to several ramifications later.

With the USD’s convertibility to gold being suspended, Nixon also ordered the gold window to be closed so that foreign governments were unable to exchange their dollars for gold. With the gold window closed, the world operated on a fiat monetary system where the money was not backed by gold or anything else. Nixon also issued an executive order to freeze on wages and prices for 90 days to counter inflation. In March 1973, the fixed exchange rate system became a floating exchange rate system. Currency exchanges were no longer the government’s principal means of administering monetary policy. The FED was free to expand monetary policy much easier and trade gaps did not need to be resolved. Later, this led to ramifications such as the instability of floating currencies. The dollar plunged by a third and there were enormous speculations against the dollar.

Central Banks & Local Banks

To understand and appreciate the value of decentralisation in the world of cryptocurrency, one needs to understand what central banks, big banks and local banks do and their centralised structure.

A central bank is a centralised financial institution responsible for overseeing the monetary system and policy of a nation or group of nations. The power and authority for planning and decisions rest with top management organised around a hierarchical structure. The processing of all transactions is carried out from a central location. Decision-making powers are retained in the head office, sending out commands to all other offices and branches. A central bank oversees a nation’s commercial banking system and acts as the nation’s principle monetary authority. Central banks focus on keeping prices stable, maximising employment, and helping to grow a country’s economy. They regulate a nation’s money supply and set interest rates. They also set the requirements for the banking industry. A central bank could be a lender of last resort to an institution or government experiencing financial difficulty (Akademie, K., 2022).

Central banks include:

• U.S. Federal Reserve System
• Reserve Bank of Australia
• Bank of Japan
• Sveriges Riksbank
• Bank of England
• European Central Bank

Big Banks, also known as National Banks, are large centralised financial companies that operates across the country and even internally, such as the Bank of America. In the U.S., for example, a Big Bank is required to be a member of the Central Bank, the Federal Reserve System. Big banks are big and more accessible to customers than local banks. They have branches and Automated Teller Machines (ATMs) spread out across many cities.

Local banks are the smaller community banks. They are locally owned and operates as a centralised banking institution. They offer primary traditional banking services such as cheque and savings accounts and home loans. They operate under the same set of laws that govern national banks. The main issue with the centralised and traditional financial institutions is trust. A lot of people do not trust banks and do not believe banks are out to look out for them as consumers. Banks are in the business of making money, and lots of it. They charge their customers ever-increasing fees. A bank can control access to a person’s account and money. If a bank fails, a person’s lifelong money could be lost. Banks use people’s money to make loans and risky investments (Akademie, K., 2022).

SWIFT

To complete the understanding of today’s traditional money system, one needs to discuss SWIFT, the Society for Worldwide Interbank Financial Telecommunication.

SWIFT was established in 1973 and is a member-owned cooperative that provides safe and secure financial transactions for its members. Their headquarters are in Belgium and has offices in many countries. SWIFT do not hold funds or manages external clients. They do not facilitate fund transfers, instead they send payment orders which must be settled by correspondent accounts that the institutions have with each other. A standardised proprietary communications platform is used to facilitate the transmission of information about financial transactions.

SWIFT enables financial institutions to exchange transaction information, securely and reliably among themselves, including payment instructions. SWIFT assigned codes to name banks and describe transactions. These codes are also known as Bank Identifier Codes (BIC).

Issues with SWIFT are:

• They have been criticised for its inefficiency.
• Transfers passes through multiple banks before reaching the final destination, making it time consuming and costly.
• There are transparency issues regarding how much money arrives at the other end.

SWIFT is not safe from hackers which impedes the confidentiality, integrity, and availability (CIA) of the services and data (Akademie, K., 2022).

Before Cryptocurrency

Bitcoin was not the first virtual or crypto currency. The earliest pioneer projects on digital currencies were Flooz, Beenz and DigiCash (Akademie, K., 2022).

Flooz

Flooz, founded by Robert Levitan, was first issued in 1998 as part of a marketing campaign and was based in New York City (NYC). The name Flooz was based on the Arabic word “fuloos” that means money.

Users would receive Flooz coins when they have purchased on the flooz.com website. One Flooz equaled one USD. Users could then spend Flooz on more Flooze.com products or they could remit their earnings and shop at several other participating website vendors.

The adoption of Flooz by merchants and customers was limited and had a small user base. In 2001, the FBI notified Flooz.com that a Russian crime syndicate was using Flooz, and stolen credit card numbers were used to purchase Flooz and then redeemed. Flooz.com announced their closure on 26 August 2001 (Akademie, K., 2022).

Beenz

Beenz.com was another attempt to the world of cryptocurrency. It was kind of similar to Flooz where one had to buy products to earn Beenz to be used to procure other items.

Beenz was founded by Charles Cohen in 1998, with Philip Letts as the Chief Executive Officer (CEO). Beenz.com positioned itself as “the web currency”, global money that would challenge major currencies in the world. They have raised $100 million from venture capitalists.

Shortly after their launch in the U.K., the Financial Services Authority (FSA) went to Beenz London offices. The FSA suspected Beenz of operating an unlicensed bank. On the Beenz.com it was advertised as “Bank of Beenz” which caused the suspicion. However, it was just a marketing term and not operating like a bank. The phrase on the website was changed from “Bank of Beenz” to “My Beenz” to satisfy the FSA. Beenz operated in twelve countries at its peak.

When the dot com bubble burst, Beenz’s management was replaced. The company could not get additional funding and was unable to go public. Various attempts were made to try and save the company, however, after the 9/11 attacks the Beenz concepts was shelved. In 2008 CNET counted Beenz as one of the greatest dotcom disasters. The company resurfaced in 2012 but went down again in 2015 (Akademie, K., 2022).

DigiCash

DigiCash was another pioneer project in the early days of the evolution of cryptocurrency. Unlike Flooz and Beenz, DigiCash transactions were backed by anonymity protocols, which became the foundational elements of cryptocurrency protocols today.

DigiCash was founded by David Chaum in 1989. Several cryptographic protocols governed DigiCash transactions and set the currency apart from its competitors. Chaum wrote a paper describing the technological advancement in public and private key technology to create “Blind Signature Technology”. It is designed to ensure complete privacy of users who conducted online transactions. Chaum’s proposed system of cryptographic protocols were constructed in such a way that a bank or government would not be able to trace personal payments conducted online. In 1990 the technology was fully implemented and DigiCash enjoyed several years of operation.

DigiCash was a form of electronic payment that required software to withdraw notes from a bank and designate specific encrypted keys before being sent to a recipient. The Blind Signature technology improved user’s security and prevented third parties from accessing personal information through online transactions.

The Mark Twain Bank, later acquired by Mercantile Bank in Missouri, was the only US bank that supported DigiCash systems. Later, Deutsche Bank, based in Germany was the second bank to support DigiCash. DigiCash never broke into mainstream market and got the userbase they hoped for. The concept was too early before e-commerce was fully integrated within the Internet. The company declared bankruptcy in 1998. They have sold their assets to eCash Technologies, a competitor digital currency company. eCash Technologies was later acquired by InfoSpace, in 2002 (Akademie, K., 2022).

Centralised and Decentralised

The foundational premise that spurred the evolution of blockchain and cryptocurrency technology is that secure transactions can be facilitated without the need for a central authority. Today’s Bitcoin is a peer-to-peer electronic cash system that runs on the blockchain. It is a decentralised network of computers, also called nodes. However, centralisation is still a core concept for cryptocurrency exchanges.

Centralised

Customers of centralised systems place their trust in the operators of the system. Transactions can only be transacted through the tools approved and provided by the operating central authority.

The modern-day traditional money system is centralised. An all-powerful agency makes and oversee the rules. A single agency controls the flow of money. The centralised agency can wreck the system overnight. Several centralised blockchains exist today. Agency leaders can experiment with the underlying technology while sidestepping controversial questions regarding security consensus, identity, anonymity and more. This creates new risks around the technology, economy, and governance of the blockchain for it is controlled by an agency. When a single company or consortium of companies builds a centralised blockchain they theoretically own the blockchain, capture and centralise the data, determine who can access it and set the terms of the contracts.

Decentralised

A centralised blockchain infrastructure is built and govern by a central entity. A decentralised blockchain is not governed, managed, or built by a single entity.

A decentralised infrastructure is built to distribute and disperse power and authority away from any centralised authority. The blockchain allows for decentralisation. A decentralised blockchain offers every single user/computer (node) the opportunity to be a processor of transactions. A decentralised network is a “trust less” environment where there is no single point of failure. None of the nodes on the network depends on any single server point. Each node holds an entire copy of the network configurations. Additional advantages of decentralised markets are that it allows for transparency between parties. There is no regulatory oversight (this could also be a disadvantage). The absence of intermediaries could result in lower transaction costs than in regulated markets. However, some disadvantages are that decentralised markets pose challenges for regulators and law enforcement, for there is no governing authority to provide a legal framework.

The Difference Between Cryptocurrency and Fiat Money

Fiat money gets its value from its own worth, like precious metals such as gold and silver. It has attributed value because a government declares it legal tender. It has no intrinsic value. Fiat money is subjected to inflation and central banks can print more money at any time.

Cryptocurrencies are digital assets that are a medium of exchange between two parties. They allow for direct transactions between individuals without the intervention of an intermediary, such as a bank. Bitcoin, the leading cryptocurrency, has a fixed supply of 21 million, making it even scarcer than gold (Bitpanda.com, 2022).

Cryptocurrencies and fiat share many similarities, but it also offers some additional advantages:

• Both can be used for payment and as a store of value.
• Both reply on widespread consumer trust to function as a means of exchange.
• Fiat money is issued and controlled by (central) banks and governments.
• Bitcoin is produced and distributed through a process called mining and is not controlled by a central authority.
• Bitcoin is tamper-proof, can’t double-spend and can be trusted.
• A Bitcoin transaction cannot be reversed, cancelled, or charged back.