The Smart Money Economy

Digital money in a crypto wallet is only the first step. The bigger shift is a new software economy anchored in programmable blockchains.

AccessTimeIconNov 17, 2020 at 3:17 p.m. UTC
Updated May 9, 2023 at 3:13 a.m. UTC

Over the last several weeks, crypto asset prices have climbed to new heights. Bitcoin alone has broken the $300 billion market capitalization barrier, equivalent to the M1 money supply of a number of countries – from Poland, to Belgium or Austria. We can point to multiple underlying causes, including the U.S. election, the deployment of the Chinese CBDC and its $300 million in volume, and continued growth in decentralized finance and dollar-denominated stablecoins. But these symptoms are more complex than mere asset appreciation. 

To understand what 21st century money looks like, let’s review the payments value chain, and in particular the relationships among a monetary instrument, financial infrastructure, the payment rail, the current assortment of payment companies and networks, and software ecosystems. In parsing the difference between the developments in these adjacent categories, we can more clearly see what progress looks like, as well as the potential destinations for our future. 

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  • Lex Sokolin, a CoinDesk columnist, is global fintech co-head at ConsenSys, a Brooklyn, N.Y.-based blockchain software company. The following is adapted from his Fintech Blueprint newsletter.

    It is not merely that value is being digitized into an online crypto wallet. Rather, the software economy will be anchored to programmable blockchains, and those blockchains will function as the payment rails and payment networks on which sovereign and decentralized currencies are deployed. 

    Payments on today’s networks

    The usual comparison for payments rails is the Visa card network, sitting at about $420 billion in market capitalization. That valuation is not money supply, but a market valuation of the discounted cash flows of owning a payment network. The crypto equivalent would be the revenue pool accruing to miners and validators participating in securing the Bitcoin or Ethereum blockchains. The card network provides the payments infrastructure in the sense that it allows for money to move around on its network of nodes.

    Those nodes are financial or economic in nature and speak in the language of money – banks, card issuers, e-commerce sites, point of sale terminals, regulators, and so on. You can send a little bit of messaging around, but primarily you are sending a financial instrument. Value accrues to the network shareholder due to the small rent you take across all transactions.

    Therefore, your incentive as Visa is to maximize the organizational share of all transactions by broadening the network across the world and into every technological sphere. Through scale, your network gets better for participants. A payments infrastructure is a naturally occurring monopoly, like Facebook and Google. Arguably, blockchains follow similar winner-take-all dynamics. The stated Visa strategy is to build a "network of networks" and to pay $5 billion for startups like Plaid. Therefore it is likely that the traditional card networks will plug into, or overlay on top of, blockchain-based payments. This game played out in an analogous way across credit cards, e-commerce, and mobile point of sale.

    Another adoption vector for crypto assets is through existing payment gateways and processors. PayPal connects to more than 25 million merchants and 350 million users. Perhaps the recent BTC price run is in part driven by the much-discussed move by PayPal to finally incorporate bitcoin into its currency options. While we think the PayPal news is interesting and promising, it is still a nascent development. Allowing the purchase and sale of a commodity using a third-party trust company (Paxos) for capital gain is quite different from adopting a currency for exchange in economic activity. 

    PayPal sits one layer higher up the stack from Visa. It is the checkout experience for a meaningful portion of the internet. Square is the checkout experience for a meaningful portion of terrestrial small business. What's nice about PayPal and Stripe and Square and generally that footprint of modern payments companies is they are software-native and have APIs and UIs. They integrate into things and are part of the modern world. Most still ride the Visa or Mastercard "rails" and all prioritize the financial instrument of sovereign money. Their value accrues from aggregating the consumer or merchant footprint, and giving economic activity a way to flow in novel patterns.

    The type of economic activity is key. Increasingly, it is software-based and embedded in workflows that reside in the cloud. Weaving payments and financial experiences into media and commerce is then a next frontier for traditional payments companies. 


    Governments are aware of the digitization happening in their national industries. Central bank digital currencies (CBDCs) are one way for them to participate more directly in software-based economic activity, by moving the instrument of money onto emerging networks. Such action pre-empts public crypto assets from taking on the shape of money. A recent spate of projects across Thailand, Australia, France and Hong Kong highlights the race towards figuring out the right model. 

    The blockchain is not just a record of transactions. It is also a programmable environment that can execute software.

    That model is often discussed in the context of Facebook's Libra private stablecoin network and China's deployment and expansion of itsr national digital currency. The projects split into (1) wholesale CBDCs, which largely reinforce and optimize the role of banking institutions relative to the central bank's money management authority, and (2) retail CBDCs, which would bypass the banks and go directly into the wallets of consumers. The first option is about efficiency and industry cost mutualization. The second is more deeply transformative, and analogizes closely to owning bitcoin and using it to transact.

    In many of the projects above, there is a combination of a financial institution, a technology consulting firm and a blockchain company coming together. The enterprise blockchains split between IBM/Hyperledger Fabric, R3/Corda and ConsenSys/Quorum (an Ethereum protocol). The current requirements from central banks focus on the software protocol as the ledger, determining where transaction information actually lives and how it is hosted and processed. Making sure the network functions and reflects the requirements of a central bank and other industry constituents is the work of standing up a CBDC. 

    But this initial view is missing a large part of the story. The blockchain is not just a record of transactions. It is also a programmable environment that can execute software. We will see that this has deep implications for payment industry structure.  

    See also: Michael Casey and Sheila Warren - Understanding China’s Fast-Approaching Digital Yuan

    Look at the recent developments in China. Its digital yuan DCEP project has over 20 companies involved in development and launch, with a preferred spot given to the state-run banks. China's government has been giving out free money to citizens in the form of the new currency to prove the viability of the concept and drive adoption, and volumes are in the hundreds of millions of U.S. dollars. But the key part to understand is the relationship of this digital currency to the commerce ecosystems of the payments companies, WeChat and Alipay. DCEP is the money – when it sits in a wallet on the phone, it is merely a financial instrument. When you transfer it around between participants, you are reconciling financial data with the data hosted by the central government. 

    Financial institutions hold accounts at central banks and already do this all the time. Don't get us wrong, it is certainly disruptive. You could build taxation directly into consumer transaction flows or implement universal basic income or deliver COVID-related distributions with ease. But still, money is an instrument. It is not the economy.

    The smart money economy

    Ant Financial was going to have the world's largest initial public offering of $34 billion, which was 870x oversubscribed. The company is a fantastic story of innovation, global payments technology, and the digital growth of 80 million Chinese small businesses. It is precisely that small business economy that Alibaba was able to package into the mobile phone and deploy to 700 million people on the Ant Financial payment rail. To engage with Chinese commerce requires Ant’s payments rails, in the same way that apps on the iPhone need Apple’s operating system.

    And yet, the Chinese authorities shut down the IPO and are forcing the company to return money to investors. Perhaps it was Jack Ma, the country's wealthiest private businessman ($50+ billion net worth), not sufficiently following the party line about regulation. Or perhaps, as the country tries to launch a national digital money, one must flex against the largest digital storefront in which that money must be used. If the Chinese government is trying to close down competition related to its digital yuan, removing stablecoins and other cash equivalents to scale out its national solution and having Ant (and Tencent) under clear instruction becomes paramount.

    In other words, what is interesting about money supply is not the money, but what you can do with it. Ant Financial gives us an example of how a financial rail can live within mobile commerce and become worth $250 billion in enterprise value as that commerce grows. A programmable blockchain like Ethereum is similarly able to incorporate the functions and business logic of the payments companies, as well as the digital economy of Apple’s operating system, assuming scaling works out of course. Today, examples already include decentralized finance, crypto art and various virtual worlds. A blockchain-based CBDC will lead to even deeper integration between money, payments infrastructure and digital commerce.

    Remember that this happened to the internet on a 20-year time horizon. The trillion-dollar valuations supported by emergent business models – the operating system of the iPhone and the shopping footprint of Amazon – give us the necessary patience and proof. Neither commercial path was yet available when people were trying to figure out the protocols to stitch together the Web. 

    The CBDC projects today ask the question of how to move money around. Bitcoin has answered this question, and perhaps an applied architecture like permissioned Ethereum will solve this for national currencies. The deeper question is, what does an economy connected to a CBDC look like? What is the shape of merchants and applications that accept digital currency? Where do they perform their economic functions? If we think the venue for computing will increasingly be on blockchains, that suggests CBDC rails should come not just with pre-installed national money but also pre-installed applications for the use of that money. A payment rail will only be adopted if it is useful, and if it is applicable to a meaningful portion of human economic activity.


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