The origins of digital currencies date back to the dot-com bubble and offered a new format for money to be expressed. Internet grew exponentially during that period with e-commerce requiring currencies and a new financial infrastructure. While legacy systems were adapting to a novel space new actors (as PayPal) improved financial efficiency and invited an era ripe for digital currencies.
The first significant success was with E-gold appearing in the late 90’s. This digital currency solved the occurring problem of legitimacy by digitalizing the value of gold thus enabling transfers of value across the Internet. It is not alone as digital currencies are found in massively multiplayer online role-playing games (MMORPG) like World of Warcraft were they are traded for digital goods. Issued and controlled by developers and are also present in social casinos as in FarmVille an agriculture-simulation game which had over 80 million active users in 2010. More reactionary Central bank digital currencies (CBDCs) are used to deliver currencies outside from the traditional reserve bank system. China is currently leading with roughly 140 million people having an account with transactions worth $9 billion. Cryptocurrencies are the most famed of digital currencies since the 2010’s with Bitcoin. The currency raised to fame by solving the plague of double-spending (when a digital token can be spent more than once) which led it to be compared to digital gold. Bitcoin marketshare is over 40% from other cryptocurrencies (10.2022) and remains very popular. The driving force for its creation was politics, not greed following the Great Recession (2007-2009) when legitimacy in financial institutions were at their lowest. Nakamoto (Bitcoin’s author) ambition was to create a currency independent of monetary policies, that had its own intrinsic value. He realized that fiat currencies derive their value solely from government legal-tender laws and did not view financial institutions as the guarantor of value. While impactful his creation wasn’t without precedence, currencies in fact appear and disappear all the time.
World war II led a British POW to recount his experience at Staglag VII A where cigarettes were used as unit of trade. Today prisoners exchange ramen (Chinese noodles) as currency while the coronavirus pandemic led a small town in Washington to issue pieces of wooden money to be spent at local businesses. Between 3’500 to 4’500 of « complementary currency systems » have been recorded in more than 50 countries. These currencies were sometimes so successful that central banks needed to intervene as in The Miracle of Wörgl, emitted in Austria during the Great depression in the small town of Wörgl. It became so efficient in creating employment that the Oesterreichische Nationalbank intervened to cut their currency short.
Beyond the fierce struggle for legitimacy that even fiat currencies compete for, it is the administrative pressure of compliance that make digital currencies highly unlikely to be adopted as a means of exchange. E-gold was a successful digital currency that became legitimate by insuring physical gold but failed following the Patriot Act of 2001 that required it to have a money transmitter license. Cryptocurrencies who derive their value from their network require many obligations (if not more) than these early digital currencies. Many of them are viewed by the IRS (revenue service for the U. S.) as property and need to be declared as such. Exchanges as Coinbase require AML (Anti-Money Laundering) and KYC (Know Your Customer) policies to be authorized, removing any promised anonymity. Further added their problematic volatility (Bitcoin has an annualized volatility of 81%).
Although fiat currencies have lost their redeeming value digital currencies will not likely become a serious threat. They are not viewed by the market as legitimate nor do they store value. Fiat currencies present today are a result of a tiresome development of legitimacy and the transfer of value. Their adoption required a lengthy process that predates the usage of coin, a technological innovation dating to the kingdom of Lydia (approx. the 7th century BC). Tangible, easy to carry and with intrinsic value coins throughout their history were often debased as during the reign of Henry VIII. We will need to wait for printing press to appear in the 15th century and nearly two centuries later to discover that printing money could be a direct substitute for coining. Another century will be required for Europeans to learn (as the Chinese did) of the printing press inflationary dangers. Receipts as payable started with London Goldsmiths, accelerated by the outbreak of civil wars in 1642. By the late 18th century governments started to issue banknotes as to finance the revolutionary wars in Europe and the United States. The French had the assignats, the Americans continentals both worthless. France’s population fear of collapse of their revolutionary regime and distrust of paper currency led to a return to metallic currency seven years later. Continentals weren’t backed by a physical asset and were overprinted which led to a return to the coin in 1792. U.S. banknotes only returned in 1861-2 after the civil war ended. Only the bank of England has had a continuous use of paper currency. Currencies were not yet fiat and will require World War I and the Great Depression (1929-39) for them to become a reality.
Before international dominance of the U.S. dollar attention was focused on the Bank of England as the pound sterling (supplanted in 1929 by the USD) was the primary reserve currency. Montagu Norman, Governor of the Bank of England was pushed by the Great Depression to unpeg the pound sterling to gold and with that precedence (1931) international exchange markets fell into worldwide currencies crises. The United States followed the Bank of England in 1933 and the Gold Bloc (European countries with a gold standard) collapsed in 1936 when France agreed to join a tripartite agreement with the UK and the US. Within 5 years a revolution occurred, all currencies (except the Swiss Franc) no longer had value by themselves but were now intrinsically and completely bonded to their governments. Monetary policy was now free to adjust their interest rates and steer the money supply. This lasted until 1944 when an international system needed to be built (Bretton Woods agreement) following World War II. Currencies pegged to the U.S. Dollar were in turn was pegged to gold at 35$ an ounce. The system lasted until 1971 when it became no longer sustainable.
Currencies voided of intrinsic and redeemable value are therefore a groundbreaking and recent phenomenon in the history of civilization. Not only did the shift to fiat currencies happen suddenly but it occurred universally across all nations. It remains a remarkable and extraordinary achievement.
Redeemable value has always been crucial for currencies but legitimacy has always taken a central importance. The denarii (roman coin) was not estimated by weight or fineness throughout its history even when some debasement occurred. This attests that legitimacy was key as for its long span the denarii was never questioned until the long-lasting Empire was starting to collapse. When instability returned populations slowly revert to valorizing currencies with intrinsic value (silver purity). Legitimacy is so decisive for currencies that even when abuse was recorded in the Middle-Ages adoption did occur as feudal lords would declare old coins illegal and would require them to be exchanged at regular intervals known as renovatio monetae. For a period of two centuries (occurring over 50 times in England) this ingenious form of taxation that required rents, fines and fees needed to be paid with new coins. A system that failed when inter-regional trade started to increase and gave rise of supra-regional coins valorizing silver purity.
As currencies format evolved throughout history intrinsic value would slowly be discarded as institutions became guarantors of value. But the consequences of having currencies redeemable value removed is still a relative new phenomenon in which the rise of cryptocurrencies are in part a reaction. Legitimacy is key for adoption and remains the central issue for digital currencies. According the Central American University one year after Bitcoin was made legal tender, most Salvadorans consider the policy as failure and remains the government’s most unpopular and criticized measure. Currencies are not only a means for exchange but a unit of trust that required a long process to be accepted. With over $40 trillion in circulation fiat currencies required an evolution of such trust as to become legitimate and remains the only means of exchange viable in physical and digital spaces. Digital currencies are continously evolving to find their relevancy but failure to consider that trust require time can only limit their future use.