Digital money and eCommerce

Our world today has a network of commerce that is fully global and rather instantaneous. The trends of globalization of the past decades paired with the advent of the internet have increased the scope and speed of commerce far beyond the already substantial increases of 20th century. Just like paper notes arose as an improvement of physical gold to keep pace with improvements of technology and associated changes in the speed of commerce, we now find that even paper notes and manually maintained accounting ledgers cannot keep up.

Rather, digital money is necessary to quickly settle transactions of value over long distances. Even for in-person purchases we have found the benefits in using digital money over lugging paper cash around or storing our savings as paper notes in our homes.

The natural result of this, however, is that in addition to our money detaching from a hard money commodity, we require intermediaries such as private banks to oversee our digital transactions. This is because the use of digital money has a unique and detrimental problem, called the double-spend problem.

The problem with anything digital is that it exists in code. A digital dollar that is represented as code could therefore be copied in perpetuity by its owner, in similar fashion to the copying of an image or a digital document. The result is that we find ourselves once more in a situation with an incredibly soft money that can be debased by increases in its supply. We would have to trust that somebody sending us a digital dollar has not previously copied it, as such that he could spend the same money twice. In other words, the only thing that prevents him from double spending that dollar is our trust. This would severely limit our circle with who we would be able to transact value, and even then, the temptation to create money out of thin air is simply too big to resist over time.

The only practical solution to this problem was similar to the one discussed earlier that addressed the auditability of gold: add a centralized party. This is where our private banks come in once more. Where in the older days banks would actually physically store and protect our money, in the digital age their primary responsibility in facilitating digital money has to do with preventing the double spending.

Whenever one person sends money to another, its the responsibility of the bank to ensure that the balance of the sender is decreased by the appropriate amount, and the balance of the receiver - which is often managed by another bank - is increased accordingly. The banks are then really just responsible for accurately updating these centralized ledgers with who owns how much of a digital currency, ensuring we cannot double-spend and create more. As discussed in detail before, this puts control of the movement of our money in the hands of those banks and the institutions that oversee them, with all its problematic consequences.

The background we covered on the history of money, why hard money is important, how gold became the primary money, and why it led to centralization and the resulting power to create more money, is important to understand as it highlights where the deeper issue lays and explains how we have gotten here. However, merely realizing that if we wish to sustain the level of commerce we have today that underpins the majority of the wealth of the world, we need a digital money anyways. If we cannot solve the double-spend problem, we end up in the same centralized situation regardless. If we wished to take part in today's economy with digital money, there simply was no alternative to the centralization money and accepting its associated consequences.

And now there is.