The title of this post may seem far-fetched to anyone who has not been keeping with the latest developments in digital currencies, but the idea of a company issuing its own currency is a serious topic of discussion in international financial technology circles.
The case for such an invention is quite strong, e.g.:
- Corporate currencies could be digital, transparent and much more secure than almost all government-backed currencies.
- Corporate currencies could be context-specific and designed to be tradable only in specific modes and for specific activities.
- Corporate currencies could be fully traceable, from creation to destruction, which is not possible with government currencies today.
- Corporate currencies could allow corporate Finance and Procurement chiefs to better manage F/X exposure by creating a closed system that could be adjusted to better hedge risk at a systemic level, rather than at the contract level, which is what typically happens today.
Undoubtedly, the most famous digital currency around today is Bitcoin. While most people have heard of it, not everyone understand how it works. Yet as Forbes noted in 2013, the Bitcoin model is relatively straightforward:
- To get started, install a digital wallet on your computer or mobile device. This wallet is simply a free, open-source software program that will generate your first and subsequent Bitcoin addresses. There are three types of wallets – a software wallet (installed on your computer), a mobile wallet (which resides on your mobile device) or a Web wallet (located on the website of a service provider that hosts bitcoins).
- Acquire a number of Bitcoins that will be held at one of the addresses in your wallet. You can acquire Bitcoins through a number of ways – by buying them from a Bitcoin currency exchange such as Bitstamp, or through a service like BitInstant that enables fund transfers between Bitcoin exchanges and supports various payment mechanisms.
- Once you have created a Bitcoin address and have acquired Bitcoins, you can use them for an online transaction with a company that accepts Bitcoins as a payment mode. The company will send you the Bitcoin address to which you can send your Bitcoin payment. You direct the payment to that address; while the transaction takes place within seconds, verification can take 10 minutes or longer.
All Bitcoin transactions happen through, and are recorded on, what is known as the “block chain,” which is a kind of shared public ledger that underlies the whole system. The block chain not only verifies the transactions but also ensures that the entire system will ultimately limit the number of Bitcoins (as a hedge against potential devaluation). The basic Bitcoin model is simple, but the mathematics and specifics of how the entire ecosystem works are actually quite complex, so much so that even people who regularly write about Bitcoin don’t really understand how it all works.
Not all digital currencies are as famous or as complicated in form or function. A good example of another digital currency is “Ven,” which was created in 2007 by, and for, members of a social network called “Hub Culture.” Stan Stalnaker, a member of Ven, explained the three main aspects of Ven as follows:
- Accountancy: All Ven account holders (also Hub Culture members) receive an online account system that enables them to buy, send, and exchange Ven. These transactions are recorded in a log we call ‘Ven Transactions’ that allow the user to easily see Ven coming in and going out.
- Exchange: The Ven system allows you to send Ven to an email address or a friend in the network, using the social graph of your contacts as a reference point and linkage system from which you can exchange the currency. Payments are made instantly to the targets and are not refundable, so its important that the sender is confident they really want to ‘spend’ the Ven when making an exchange. Ven can be exchanged infinitely within the economy and between members, but when a member wants to ‘cash out’ they do so through the thousands of items available in the Hub Stores, – where we sell goods and services priced in Ven.
- Pricing: The value of Ven is determined by a basket of currencies, commodities and carbon futures. These components fluctuate on the financial markets, and together make for a very stable currency. This makes Ven useful for institutional trades and provides a stable currency value. We only issue Ven at market rates at the time of exchange/purchase for traditional currencies, then hold the value of those reserves to enable redemption when a person wants to spend their Ven in the stores.
Early in Ven’s history, there was a challenge in establishing the right value for Ven. In response, notes, Stalnaker:
…2008 we assigned Ven a value language—10 VEN = 1 USD—and began to sell it for redemption between members and’= in Pavilions (retail places developed to accept the currency). The fundamental advance in Ven was that it was global, digital, and could be exchanged to anyone, at little incremental cost. Later we made Ven more stable by pricing it from a basket of currencies, which meant the price moved less than a single national fiat currency. To make it more grounded, we added commodities linking it to hard assets. Then we added carbon futures, creating a carbon component to the value. The language was now efficient, stable and green, and today demand for Ven is growing rapidly.
What’s important to note about digital currencies, and what makes them attractive to financial theorists, is that they are basically closed payment systems that operate by a specific set of rules. Historically, the mechanics of such systems were physically complex (physically printing and distributing money was a laborious and expensive task), which meant that most companies were happy to use government payment mechanisms and avoid the hassle of having their own currency (with famous exemptions such as rewards points or frequent flier miles). Now, imagine a post-Bitcoin world where setting up a currency is so easy anyone can do it in one day: simply set the currency’s rules, participants, exchange mechanism and reference value and you’re in business. Suddenly, a corporate finance function can set up its own currency through which it will contract for goods and services as well as pay its suppliers. It can set the value of its currency against Dollars, Euros, or any combination of currencies. It can fix its exchange rate or even create an internal market where suppliers can trade it. Indeed, there are almost no limits to what a large company such as Apple or Google could do with its own currency.
As noted earlier, there could be many advantages to a corporation in issuing its own global currency, from significantly lower transaction and fraud costs to greater transparency and faster money flows. The advantages are so strong that even the U.S. Federal Reserve has started to wonder about how digital currencies might change the way in which global commerce operates. Indeed, a 2015 Federal Reserve paper noted that digital currencies are “not considered a sufficiently mature technology at this time” but needed to be monitored given the “significant interest in the marketplace.”
On a broader level, what attracts many people to the idea of digital currencies goes beyond the needs of corporations and to a broader sense that this was a missing piece of the entire e-commerce revolution. Marc Andreessen explained this viewpoint well in a Washington Post interview:
We knew we were missing this; we just didn’t know what it was. There is no reason on earth for anybody to be on the Internet today to be typing in a credit card number to buy something. It’s insane, because — which is why you have all these security problems, the Target hack and all this crazy…. And these high fees, this high fraud rate. It doesn’t make sense online to have a payment mechanism that requires you to hand over your credentials to make a payment. That’s just an invitation to fraud and identity theft. It’s just stupid.
But we didn’t have the better way of doing it. So we didn’t know what else to do, and now we have the better way of doing it. Now, it’s going to take time. We’re quite confident that when we’re sitting here in 20 years, we’ll be talking about Bitcoin the way we talk about the Internet today. We just need time for it to play out.
I happen to agree with Andreessen that Bitcoin-like systems will change global commerce, and I think a corporate currency will be its likely first iteration. The model put into place will have to address the many risks that digital currencies will create, and it will be interesting to see what problems will arise from these new mechanisms. But these risks will not stop this evolution. Not too long from now, being asked to pay in “Apples” or “Googles” may not seem such a strange a question to consider.