By Michael V. Copeland
Partner, Andreessen Horowitz
Not since the arrival of the almighty dollar has currency been poised for a more dramatic leap forward.
There was a time when people happily used chickens, pigs, or a nice pile of lumber as payment for a cow, some clothes, or anything else of value. And then some smart people got behind a breakthrough—they introduced currency.
Swatches of buckskin, stamped pieces of gold, and later, paper notes—these were a mighty intellectual and technological leap ahead from that clucking bird. It may not seem like it in today’s world, where cash has a whiff of the downright prehistoric, but paper currency was mind-blowing in its heyday—the first U.S. government-issued currency debuted during the Civil War—because of its advanced features: It was lightweight, portable, reliable (hyper-inflationary events notwithstanding), efficient, and powerful. These are descriptors we might apply to the latest smartphone today.
The point is, currency for hundreds of years has been an evolving form of technology, with the faster, better, cheaper underpinnings found in all great technologies. But arguably, not since the arrival of the greenback has currency been poised for a more dramatic leap forward. Digital currency is finally taking hold.
Driven by two massive technological waves—the Internet and the mobile phone—digital currency is bringing banking to the unbanked; it’s making new forms of transactions financially feasible; and it’s allowing currency to do things it could never do when trapped in a physical form.
With digital currency as the stream through which value flows, barriers to truly global trade are poised to fall. The knock-on effect is that the advantage that developed nations held for so long—as hubs through which value of all kinds move—is weakening. As with all forms of digital goods, it’s the most connected nation, or company, or individual that has the power. That does not necessarily mean the nations and companies that have traditionally led the global economy will continue to lead. The fastest, most secure data exchange will win—wherever it may be.
Digital currency acts as a catalyst for all kinds of businesses—large, small, legal, and not so legal. It’s enabling a whole new wave of competition. Whether you are running the corporate show, or investing in it, be prepared to take digital currency on, or be prepared to be left behind.
The digital currency everyone has heard of lately is Bitcoin, but there are many other forms this new platform takes. Each has its network within which it is exchanged. For Bitcoin that is the Internet, and by extension, the globe. For others it might be a single country, a company, or a game (hard to call it a currency if you can’t get it out of the game, but it’s pretty close). At a high level, what all these currencies have in common is the conversion of value into ones and zeros, into digital data. That in itself isn’t revolutionary. Banking today is mostly a function of moving around digital data. Where it gets far more interesting is when smart software hooks into that data and emerges on the front-end as new services serving networks of people and organizations—that’s when new digital currencies will be able to take on properties we’ve never seen. For example, banking without any banks.
In the U.S. with banks on every other downtown corner, it is hard to wrap your head around the fact that more than 2.5 billion people worldwide don’t have bank accounts. What they do have, however, are mobile phones. Take a form of digital currency, introduce some software that allows value to be exchanged on phones between people and businesses, and all of a sudden “money” is moving where it never has. That is the case in Kenya with the digital currency M-Pesa (“M” stands for mobile, “Pesa” is Swahili for money).
Launched in 2007 by the nation’s largest wireless carrier, Safaricom, M-Pesa is a service that allows registered users to do things like deposit money in accounts, transfer money person-to-person, or to one of tens of thousands of shops that take the digital currency. You put value in; it resides on the network (so if you lose your phone you don’t lose your money) and you take it out on your phone.
Even more interesting is that the service has led to a wide variety of businesses being built on top of it that couldn’t have been anticipated—such as shops and bars, travel insurance on animals being brought to market by farmers, and of course lots of money transfers from the city to relatives in rural areas. Saving for later—to buy a home, or to buy that thing to start a business—is another byproduct of this form of digital currency. M-Pesa’s success has been phenomenal. Recent statistics show that fully one-quarter of the Kenyan economy flows through M-Pesa.
Other countries are taking a crack at a similar mobile digital currency. Vodacom (majority owned by UK-based Vodafone, which owns a minority stake of Safaricom) has launched M-Pesa in other African nations, as well as India and parts of Eastern Europe. In Latin America, Ecuador recently announced it would launch a nationwide digital currency, residing largely on people’s smartphones to accompany the U.S. dollars that are the country’s official currency. The hope is that a digital currency will bring the same safety and ease of monetary transfer that the M-Pesa has to Kenyans to the roughly 40% of Ecuadoreans who don’t have access to a bank account. Plus, it offers Ecuadoreans the opportunity to start saving. The difference in Ecuador is that the Bank of Ecuador is backing the digital currency, essentially bypassing the big commercial banks in the nation, at least for now.