The Future Of Money

Imagine an information exchange into which all requirements for all imaginable goods and services are stored and available to all those who care to access it. Imagine an encrypted electronic card that identifies you with your fingerprint—dna if you care—and automatically credits you when you earn and debits you when you spend. Imagine a world of totally anonymous dealings in money for you, no one knowing what you earn and spend. Imagine a world without currency notes. Imagine a world without transaction costs, income-taxes and inflation. That is the power of enabling a costless exchange for goods and services that spreads across the world.

That’s the future of money.

We have a positive rate of inflation today because we have to store purchasing power. We have to print currency that actually earns nothing to support all exchanges in the system. If all storage is in the form of deployed wealth and all spends are in the form of e-transfers, we need no currency. If all money in a system is "working", there’s no need for idle cash and inflation is zero.

We have transaction costs now as we think an intermediary can help us execute our deal. We pay the broker to get us accommodation in a new town. The broker’s cost has to come down if he looked at larger sets of customers and if the speed of matching a deal moves up. Information is the key to reducing transaction costs. What an information exchange that links to a system for wealth transfer will achieve is a higher velocity of money. If money and its uses ran a little more for all of us, we will do so much more with the same money. That’s the key to efficient use of money, which technology will help us get.

The best part of this dream is yet to begin. If an information exchange puts our earnings on fast track, can derivatives be far behind? There will be a near-explosion of futures and options on the information space—along with zillion exotics. You can use the credits your kid daughter gets for her birthday to buy ‘medicine futures’ in New Zealand. If she didn’t care for it, she would swap it for ‘creative photography’ in Venezuela—swaptions, which give her the option to swap the two, provided the national income futures of the two countries of study move the way she expected. The power of efficient exchange will be upon us and we could zip along costlessly exercising our options. Most illiquid assets will become liquid and our bankers will be busy managing our asset transactions and values for us, rather than staidly verifying signatures and passing cheques.

The icing on the cake is zero tax. Sitting in Mauritius, you, an Indian citizen, designed an aircraft that will be sold by the US to Zimbabwe for use in its project at Beijing. Your payments will flow into your accounts at Bahrain and Mumbai. Where was your income earned and where will it be taxed? The future of money, as I see it, will annoy governments no end. Current-day restrictions on encryption technologies is a well-known response to this "loss of control". Governments love to peep into our transactions. If all assets and transactions are electronic, tracking them is so easy. Governments may offer to actually file your tax returns for you, since they know all!

But the danger actually is in the intrusion into financial privacy, which democracies will refuse to suffer. The best-case scenario, then, is the total lack of control and the end of sovereignty. Income-tax has to go and we all will pay 0.01 paise on every rupee spent—and that would be more than enough for the government. Then government is a direct stake-holder in the speed of our information exchange, transfer of credit and velocity of money. Plus, communities will begin to create their own money and before we know it, there would be parallel money systems all over the world.

This is part of a future that’s already happened. Smart cards that enable an e-purse and also store a wealth of information have been around for a while. There are at least 1,500 private currency systems in the world, including Ithaca, which operates right under the nose of the world’s financial capital, New York. Everyone in the network logs in or draws out "Ithaca hours"—each equivalent to $10, for goods and services sold or bought. All earnings and spends are adjusted against the Ithaca hours and communities have discovered higher efficiency and harmony.

We’re on our way to creating our own money, storing and using it the way we like and doing all this with greater efficiency, zero tax, lower cost and with immense benefits. Walter Wriston, the former chairman of Citibank, had famously said, "Information about money has become almost as important as money itself."Indeed!

(The author is head, training and development, at Prudential icici Asset Management Co.)