What is digital money? Can money be made from mere information? Everyone is already using digital methods when dealing with money, from credit cards to online banking to debiting recurring costs. Since no one receives their salary in cash at the end of the month, taxes and the costs for the various insurance policies are debited in advance. There are no more tax collectors. Digital money isn't just about efficiency and simplification – the extreme could be a digital currency that can exclude anyone from all economic and social relationships that have to be paid for in some way.
On the other hand, digital currencies promise the possibility of a monetary system that has a decentralized structure and is able to control itself thanks to built-in programmed algorithms. In such a system, everyone could have direct access to the money created by the central bank, whereas today a large part of the central bank money is stuck in commercial banks.
At the moment, everyone is witnessing how the huge sums of aid newly created by the central banks – in ways that are difficult to understand for outsiders – only reach those who can invest their money with asset managers who have sufficient insider knowledge and the right connections. In contrast, digital money could enable complete transparency of the economy and the financial system and everyone's access to state money creation, and at the same time make private money creation by the banks superfluous. This article aims to introduce digital money transactions, new technologies and much more.
The transactions
According to the Digital Economy Compass released by Statista – a German company specializing in market and consumer data – here are the latest headings that come to the fore. The digital payment services include Google Pay, Apple Pay, PayPal and Alipay while personal finance encompasses household bookkeeping, private financial planning, asset management, retirement provision or alternative lending, which consists of internet-brokered personal loans or micro-loans. The alternative finance appears as crowdfunding and Bitcoin.
The share of cash payments is falling significantly worldwide. The less developed countries in particular are lagging behind. There is much greater distrust of the success of the state and large companies. The situation in Germany is similar to that in the United Kingdom.
New technologies
To understand digital money and the new currencies, it is necessary to take a look at the technologies that make them possible. Let's start with Distributed ledger technology, which literally translated means Distributed cash books. Today every private person and every company keeps their own cash book. It is possible to open different accounts and custody accounts, but somewhere everyone will keep records for themselves in order to keep track of their financial situation, even if only in their heads.
Today, all financial transactions have to be carried out twice and more than once: if you buy a car, for example, you will enter the increase in your material assets in your private accounts and the departure of money as an offsetting entry. One's house bank has an account, as does the car dealer's house bank, the car manufacturer's house bank and finally, the respective accounting department of each of the companies involved. In the case of a distributed cash book, all of this is combined in a common database in which all data is kept together and everyone with their rights can query and view their data. It no longer has to be booked twice or more than once. My exits are at the same time the entrances to the other and vice versa. That would massively reduce the transaction costs of payment transactions and make a large part of today's work in banks and invoicing departments superfluous.
Blockchain is the most discussed technology with which distributed cash books are to be set up. There is currently a race among the major banks and Internet companies to see who can file the most patents in this area and gain an advantage. The key question is data security. How can it be guaranteed that everyone only has access to their data and how can it be ensured that someone does not subsequently change something to their own data or to the data of others? Is there a risk of attacks by hackers or other system crashes? The procedures are now so good that the blockchain is being introduced not only for digital money, but also for patents, quality certificates, vehicle documents, the measurement results of medical examinations in patient files and so on.
One example of this is the introduction of a blockchain as a safeguard against counterfeit drugs. The basic idea: The data is not managed centrally, but distributed in numerous copies. If someone tries to manipulate or even delete something, this would become visible in the comparison of the copies and can be restored. The details of this technology are an issue in themselves.
All experts agree that this technology will trigger another major upheaval greater than we have already seen with the Internet and the smartphone. In addition to technological and security issues, there is still the problem of horrific energy consumption. A negative example: Bitcoin uses blockchain technology and currently consumes more energy than the total consumption of a country like Denmark. However, newer processes are already considerably more energy-efficient.
Other functions
In the narrower sense, however, one can only speak of digital money if the previously known functions of money as a means of payment are not simply reproduced, but rather completely new functions are created. Everyone will experience this when gasoline cars are replaced by electric cars. When you fill up your car today, you go to the gas station to pay. When charging electric cars, the kilowatt hours transferred are measured and debited directly. This example can be easily transferred. Today, many more books are bought than read. How about buying digital books that are only paid for as they are read, page by page, minute by minute? The digital book recognizes when it is opened. Similar booking procedures are already being introduced for the purchase and playback of films.
This change will fully assert itself with the conversion of production to digitized processes. The costs of a machine are calculated and posted based on its use. This goes as far as the use of combine harvesters in agriculture or robots in the household. Leasing cars only give a taste of what's to come. Soon we will only pay for cars when we drive them. Such a change will be technically possible and commercially successful if the software development component of the production of the devices (machines, cars) becomes larger and larger compared to the costs of raw materials and classic production. Once the software has been developed, it can be copied and distributed as often as required without great additional costs. Therefore, a mixed calculation is to be expected, as is customary in company accounting anyway. Commercial and technical calculations are growing together.
In industrial companies, the flow of goods and money no longer have to be recorded and calculated independently of one another, but are integrated. Everyone can imagine that the future of such a company will look completely different from what we are used to. (This explains the great importance of the politically controversial new standards such as 5G, the fifth generation of mobile communications, which are necessary for data transmission of this type. Those who are the first to introduce networks of this type have a head start in testing and introducing programmable and electronic money Exchange of all related documents.)
Up until now, digital money is mainly known in everyday life from new currencies. There are few who shop with these currencies, but startled by the business press everyone wonders whether it is worth investing their wealth in Bitcoin instead of stocks, government bonds or gold. In the meantime, the proportion of new investments in Bitcoin in the U.S. should correspond to about a tenth of the new investments in gold.