Money has taken many forms through the ages, from physical forms such as stones or shells to dematerialised bits and bytes. Money in itself has no value apart from being a medium of exchange and a unit of measurement.
Bartering most likely predated money with easily traded items like animal skins, and weapons evolving to be a type of currency. Salt, which was a necessity in hot climates, has been used for barter and a form of currency for centuries. The word salary comes from the Latin salarium, which was the money paid to Roman soldiers to buy salt.
The introduction of money in the form of coins brought a measure of standardisation to transactions. Coins in a form familiar to us today were introduced in the region of Lydia (today Western Turkey). In 600 B.C., Lydia's King Alyattes minted the first official currency, the coins being made from electrum, a mixture of silver and gold.
The next significant development in the history of money was the introduction of paper money in around 700 B.C., when the Chinese moved from coins to paper money. The widespread adoption of paper money in the Western world in the 1600s, certainly made life a lot easier, obviating the need for lugging around sacks of metal.
Shortly after the end of World War II, the world's first charge card was introduced. Though limited in scope compared to today’s credit cards, these cards became increasingly popular and led to the introduction of ATMs and debit cards. With the introduction of the World Wide Web, electronic money and payment services were introduced and today we do not need anything physical, just a stream of 0's and 1's, bits, and bytes to transact business.
Before cryptocurrency there was M-PESA, a phone-based money-transfer system created in Kenya by mobile provider Safaricom. Some ninety percent of Kenyans lack bank accounts, and M-PESA is used to deposit funds and transfer them to others as payments, at parity with the Kenyan shilling, with low transaction costs. M-PESA does not require cards or terminals, instead it uses the ubiquitous mobile phone. This use of everyday, readily available technology was key to the widespread adoption of M-PESA. Mobile Payments are being adopted increasingly rapidly in both emerging and developed markets, providing access to digital financial services as a low-cost alternative to a traditional payment and bank infrastructure.
Popular forms of cryptocurrency are Bitcoin and Ethereum. Unlike other forms of currency from the time coins were first minted in Lydia in 600 BC, cryptocurrency is decentralised, owned by no one individual or corporation. Mining bitcoin is a process akin to the production of one of the first forms of money, stone discs intricately carved from limestone. Both processes are resource intensive.
Cryptocurrencies create a decentralised store of value separate from any government-backed fiat currency. With cryptocurrencies, the key issue is governance - ownership, transfer of ownership and transparency. A cryptoasset, on the other hand, is an asset in its own right and is fungible with other tradable assets
If mainstream use of digital money is going to take off, the preferences and needs of consumers are paramount, with quick, convenient, secure, and cheap payment methods - including for payments abroad being at the fore. The "trust factor" is essential for digital assets, and not just for consumers. To go mainstream and become a central part of the financial services industry, trust is also paramount.
Although central banks maintain there is no intention to abolish cash, use of physical cash is declining, as cashless payments gain ground. COVID-19 has given cashless payments a boost.
Cryptocurrencies were initially developed to circumvent the banking system, however, the next development in money will be the issuance of central bank digital currencies (CBDCs) - which already exist for central bank counterparties. China is in the lead in the CBDC race and is already testing its digital yuan. China led the way around 700 BC with the introduction of paper money and it is apt that China is once again leading the way in smart money innovations with the introduction of what will be perhaps the world's first CBDC.
Central banks will not be the only providers of digital currency; global corporations, financial institutions as well as governments are exploring how to harness its potential. PayPal allows users in the US to buy, hold and sell cryptocurrency directly from their PayPal accounts, and Visa has filed a patent for its own blockchain-based digital dollar. Facebook’s Libra digital currency has struggled with some of the original members dropping out. Shopify, though, recently joined the Libra project. Amazon is getting traction with a digital payment system and more and more Big Tech and blue blood financial firms are coming on board.
As regulated, connected infrastructure links together with institutional and consumer applications for digital assets, with transparency and trust, confidence will grow in this asset class on a global scale. On July 22, 2020, the US Office of the Comptroller of the Currency (OCC) published an interpretive letter clarifying national banks' and federal savings associations' authority to provide cryptocurrency custody services for customers. The OCC has specifically recognized the importance of digital assets and the authority for banks to provide safekeeping for such assets since 1998. The July letter simply concludes that providing cryptocurrency custody services, including holding unique cryptographic keys associated with cryptocurrency, is a modern form of traditional bank activities related to custody services.
Digitisation is now fully underway, irreversible, and accelerating. Financial instruments will become fully digitised. Digital assets are increasingly being adopted by investors globally. Of key importance to the market and of prime importance in attracting institutional investment money, which is the new holy grail of cryptocurrency, is regulated and efficient investment products. In the last few years companies such as CryptoCompare have built out the data infrastructure to provide these products. Charles Hayter, CEO of CryptoCompare said “Institutional-calibre pricing feeds and reference rates are a crucial component to building products suitable for institutional investors. In the coming decade we expect to see the bulk of digital asset allocations from institutions via ETPs, ETNs and other regulated products.”
The father of the financial futures market is Leo Melamed, former Chairman of the Chicago Mercantile Exchange. Léo Melamed, has said that Bitcoin is likely to become a new asset class and will attract major investors. “That’s a very important step for Bitcoin’s history . . . We will regulate, make Bitcoin not wild, nor wilder. We’ll tame it into a regular type instrument of trade with rules,” he told Reuters in November 2017.
In 2017 MV Index Solutions (MVIS) launched the first financial standard benchmarks for the digital asset markets. These indices provide institutional-grade investment benchmarks to the largest and most liquid digital assets and are rules-based, transparent, and investable. The MVIS Digital Asset Index family now includes more than 30 standard and custom indices, and more than $500 million in licensed assets track an MVIS index. “We are proud to be the leader in the digital asset index arena, and are committed to continual innovation in benchmarking the dynamic cryptocurrency space,” stated Steven Schoenfeld, CEO of MVIS.
The CME Group launched its first bitcoin futures product in December 2017 and ICE backed Bakkt launched futures contracts on Bitcoin in December 2019. These futures contracts bring a trusted price discovery process upon which investors can rely.
The Singapore Exchange (SGX) is collaborating with CryptoCompare to launch crypto indexes under the SGX iEdge index suite. The new indexes - iEdge Bitcoin Index and iEdge Ethereum Index - mark SGX Index Edge's entry into the digital currency asset class. “The rise in the level of sophistication in the digital asset industry has run in parallel with the increase in institutional participation across Asia,” said Simon Karaban, Senior Vice President at SGX. “The timing of the launch is appropriate given the increasing appetite of institutional investors in Asia to participate in digital assets as an alternate asset class.”
As we near the end of 2020, investments in cryptoassets are going mainstream with professional investors. Fund managers, specialist hedge funds and family offices are now active players with blue chip organisations offering enterprise-quality custody and trade execution services for digital assets. Exchange listed Bitcoin-tracking ETPs enable professional investors to get exposure to cryptocurrencies in a regulated environment and this is one of the drivers of the recent rally in the price of Bitcoin, and a significant step towards mainstream adoption of crypto assets in conventional financial portfolios.
In November VanEck launched a bitcoin ETN on Deutsche Börse.
"VanEck has a rich history and leadership in financial innovation. The firm started offering active strategies in international equities (1955), gold shares (1968), emerging markets (1993); added passive strategies in 2006 and has emerged as top 10 ETF sponsor globally. In that spirit, we are committed to experiment with and support Bitcoin and digital asset focused financial innovation. The firm continues to lead in building and maintaining innovative, investment-friendly and regulatory-conscious access vehicles." said Gabor Gurbacs, VanEck's Director of Digital Asset Strategy
It took ten years for financial futures in Chicago to take off. New markets and new asset classes have been heralded before. Some have succeeded and some have failed, but this new asset class is well on its way to success. When Leo speaks, markets listen.
