A Monetary Renaissance: Bitcoin’s Digital Revolution

Should someone have control of money or should no one?

by Datuk Dr. Mohamed Arif bin Nun, Former CEO of Multimedia Development Corporation, taken from the foreword in “The Digital Transformation of Money: A Primer on Why Bitcoin Matters and How it Works.”

Earlier this year, I had the privilege to meet with a few board directors who were very kind in sharing their thoughts and feedback. They were helping me with a Bitcoin adoption framework and course for senior decision makers that I was developing. My work is structured to cover key insights on why this thing called Bitcoin even matters, how it may impact organisations and individuals, and describing how its blockchain works in layman terms. However, before I could even begin, one of the directors asked, “actually, what even is this Bitcoin thing really?”

Well, one can take multiple different directions in answering that question. If you’re familiar with accounting, it could be described as a general ledger (or book of accounts) without an owner. If you’re into law or governance, it could be described as a set of rules that establishes zero ownership of the network and ensures the scarcity of its monetary digital asset. If you’re into risk management, then Bitcoin can be described as the first digital bearer asset that carries zero counterparty risk. If you’re into tech, you could describe it as a decentralised, peer-to-peer network that timestamps and records every transaction of its finite digital tokens. These are just a few of the ways to describe Bitcoin, though there are certainly many others. However, personally for me, I would describe Bitcoin as the best way to protect my stored labour from the effects of inflation and a hedge against a global debt crisis.

At this point, you may be wondering about some of the terms I’ve used above. In the context of this article, I will address a few of them. What I will discuss here sets the basis and context as to why the global monetary system as we know it is going through this digital transformation of money and why, in my opinion, there is a race towards digital currencies in general, some for good reasons and some not so much. As a technologist who has been involved with digital transformation for over 17 years, I look at money as simply another technology. Gone are the days where we used to transact with one another using antiquated technologies like glass beads and cowrie shells. We then saw better monetary technologies in precious metals like gold and silver.

Today, most of our transactions globally are represented digitally on our mobile screens. However, the way we account for and manage those digits is essentially what is undergoing the digital transformation of money. This is where advancements in terms of Bitcoin and its blockchain network, and more broadly, distributed ledger technologies, come into the picture. To understand this better, I will expand on the following points: 1) money as a store of labour and productivity, 2) physical and digital tokens as a representation of money (token money), and 3) ledgers as a way to track monetary transactions (ledger money). At the end of this article, I will share some steps that can be taken by governments, organisations, and individuals to better navigate this new paradigm that has already shifted and will never go back to how we currently know it.

Money as a Representation of Labour and Productivity

As a way to explore this point, we must first ask “what exactly is money?” In my opinion, this will be one of the questions that defines this decade, but I digress. We can answer this question by describing some of the basic properties money needs to have such as portability, durability, divisibility, and fungibility. Each is pretty self-explanatory. For instance, portability means that money must be easy to carry and use, whereas fungibility means each unit of the currency is interchangeable with any other identical unit, essential for its role as a medium of exchange.

More importantly, we can also describe money by the roles it needs to play. More specifically, money is used as a way to: 1) measure value, that is, unit of account, which facilitates economic calculation and comparison, essential for budgeting and financial planning; 2) represent value and make transactions easier, that is, medium of exchange; and 3) retain an amount of value that we assign to it over a period of time, that is, store of value.

So, if money is essentially a way for us to measure, exchange, and store value, then what exactly is value? The Oxford Dictionary defines value as “the regard that something is held to deserve, the importance, worth, or usefulness of something.” In other words, one can argue that money has value based on the amount of value that we’ve generated that someone else also finds of value. The next logical question then is to ask how do we generate value? This is where we get into the crux of the argument in this section. We typically generate value through some form of labour, productivity, effort, and more, that someone else also finds of value, where it can then be converted, exchanged, stored, represented, etc. as some form of money, if one chooses.

To illustrate, consider a chef who uses their culinary skills to provide intricate, delicious meals. Each dish sold not only reflects the chef’s effort and skills but also meets the immediate needs and preferences of consumers, thereby creating economic value through practical and enjoyable eating experiences. Similarly, a software developer contributes to value creation by designing applications that enhance the productivity of others. Their intellectual labour enables countless users to perform their tasks more efficiently and effectively, multiplying the generation of value across various sectors.

At the end of the day, we use money to measure, exchange, and store the value generated from our labour and productivity. It allows the chef and the software developer to not only measure and exchange value, but more importantly, to preserve the value they create. This leads us to an important question: what is the best form of money to store all this value we’ve generated and why?

Token Money: Physical and Digital Representations of Money

Historically, the evolution of money has seen a transition from tangible assets like glass beads, cowrie shells, and rai stones to more universally valued substances such as gold and silver. Each form of money, for a time, successfully fulfilled essential roles—acting as a medium of exchange, a unit of account, and a store of value. One significant advantage of using physical tokens was the immediate finality of transactions. Once control of the token changed hands, it was impossible to initiate another transaction i.e. to spend the same money twice (double spend).

However, physical tokens like gold and silver presented challenges; they were cumbersome, difficult to secure, and inefficient for settling large or cross-border transactions. An early solution to these issues was the use of trusted third parties such as banks, which began issuing paper tokens and IOUs to represent the physical gold stored in their vaults. This innovation facilitated easier transactions and enabled the use of credit, but also led to a system where more paper money was issued than the gold it represented. The departure from a gold-backed currency system became inevitable, particularly after significant legislative and economic shifts such as the US Federal Reserve Act of 1913, the Bretton Woods Agreement in 1944, and President Nixon’s closure of the gold window in 1971. Consequently, modern money is predominantly debt-based.

Fast forward to today, we now see a vast majority of our transactions conducted electronically globally. Despite the advancements, the challenge of ensuring the integrity of digital transactions remains—specifically, the issue of double-spending. Trusted third parties, such as banks and payment gateways, still play a crucial role in verifying that each digital unit of currency is spent only once. However, the invention of Bitcoin (and more broadly, the advent of blockchain and distributed ledger technology) promises a paradigm shift in the monetary system. Bitcoin has a decentralised approach to recording transactions; this enables a trust-less network, enhances security, and reduces the need for intermediaries. This approach also ensures that each digital token can be spent only once and is verified by consensus among all participants in the network.

At the end of the day, money is essentially a technology, with advantages and challenges, that enables a consensus-based, tokenised representation of a long-term store of labour and productivity, which is also used to measure and exchange value. As we witness these shifts, it becomes imperative to assess not only the technological capabilities but also the ethical and economic implications of these new forms of money. With the foundational changes brought about by blockchain and cryptocurrencies, we must critically evaluate what the ‘best’ technology means—not just in terms of efficiency and security but also in accessibility and fairness. So, if that is true, then what is the best technology out there today and why?

Ledger Money: Money Based on Credit and Methods to Record Transactions and Ownership

There are two points that I want to get across here i.e., 1) the technology and method in which banks use to manage money electronically, and 2) money that is based on credit (debt). First of all, what in the world is a ledger? In simple terms, a ledger is essentially a way to track a transaction from person A to person B or in other words from Account 1 to Account 2. Since the second half of last century to today, banks and other financial institutions have managed a vast amount of these types of transactions across countless account ledgers in their IBM mainframe systems. Most of our money effectively resides within some form of this type of system somewhere in the world. Individually and collectively, we trust these banks and financial institutions to manage and safeguard our money absent any political or biased influence, especially if it can impact the quality of our lives. Over the last half century or so, banks and financial institutions, through this system of account ledgers and trust, have been able to deliver its promise to manage and safeguard our money efficiently and effectively. Or has it?

Concerning the second point, all of the money as we know it today is entirely based on debt. One primary way new money comes into existence is through the banking system when a new loan is created. This method of money creation, underpinning much of our global economy, relies on the theory of the credit creation of money. According to Prof. Richard A. Werner in his 2014 paper titled “Can banks individually create money out of nothing? — The theories and the empirical evidence,” he states clearly, “Thus it can now be said with confidence for the first time – possibly in the 5000 years' history of banking - that it has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air.” In essence, it is crucial to understand that the more debt there is in the world, the greater the total money supply becomes. While this system is designed to facilitate economic growth and liquidity, it also means that money's value can be inherently unstable. Banks essentially have the authority to create money 'out of thin air' and charge interest on these loans, a power that acts as a double-edged sword. On one hand, it enables economic expansion and the easy availability of credit, but on the other, it raises questions about long-term financial stability and the true 'cost' of money.

As a consumer of goods and services priced in this debt-based currency, and as someone whose retirement savings are held in fiat money, I find myself questioning the prudence of storing long term wealth in a currency whose supply is effectively limitless. Is it wise to hold significant assets in a currency that might be subject to inflationary pressures or lose value over time? This fundamental question challenges us to think critically about the traditional monetary systems and explore alternatives that might offer greater security and stability for our financial future.

So, if money is simply another technology, then what are the attributes you would want that technology to have? Would you care if I had full control of the ledger? Would it matter if one day you’re no longer allowed to use that technology? What if the technology works for you only if I allow you to use it in certain designated locations and for certain designated items? Would you care if I can arbitrarily create additional supply of the money on that network and either give it to myself or those who are in my “friends and family” program? How will that additional supply impact your purchasing power?

Enter Bitcoin

In Chapter 12 on Programmable Money in my book, “The Digital Transformation of Money: A Primer on Why Bitcoin Matters and How it Works,” I describe four key principles on how to differentiate between the various types of blockchain or distributed ledger technology networks. This relates to 1) the method in determining which transactions are valid, 2) how is the network controlled and who gets to participate in the network, 3) what information on the network is visible and to whom, and 4) how are rules changed or created in the network.

In light of the digital transformation of money and capital that is ongoing, Bitcoin is the next logical step in the evolution of money especially as a consequence of the limitations in our existing monetary system and paradigm. Firstly, let me clearly state that Bitcoin is different from all the other cryptocurrencies you may have heard of previously. Secondly, it is incumbent on every single one of us to take the initiative in understanding the differences as it has impacts to our financial wellbeing whether we realise it or not. Bitcoin solves many of the limitations of the various monetary technologies that we have previously adopted in history. As we’ve discussed in this article, we’ve seen how money has evolved and solved the challenges faced by earlier versions. However, and in my opinion, there are two critical problems that our existing monetary system cannot solve, and they are open to abuse: namely, defined scarcity and decentralisation.

In contrast to our limitless money supply debt-based monetary system, Bitcoin’s supply is hard capped at 21 million in its network. Each bitcoin is then divisible into smaller units also known as satoshis or sats. Bitcoin’s scarcity is algorithmic and is hard coded into its protocol. This level of fixed and defined scarcity is unlike the existing view of a flexible money supply where the control is centralised amongst governments and banking institutions. Which brings me to my second point, Bitcoin is decentralised and has no centralised authority to govern and control the network in itself or the network participants. Bitcoin and its blockchain network are defined by the rules in its open-source software and consensus of its network participants. This ultimately democratises control and financial power while reducing the likelihood of corruption and manipulation.

Next Steps – A Call to Action

The accumulation phase of Bitcoin has already begun, with multiple countries, including the US, approving the trading of spot Bitcoin exchange-traded funds (ETFs) on their local stock exchanges. This milestone signifies Bitcoin’s growing acceptance in mainstream finance, offering a new acquisition method, albeit within traditional frameworks. While this provides price exposure rather than direct ownership and custody of Bitcoin, it also demonstrates increasing adoption by individuals, organisations, and even countries. As we move forward, it’s crucial for governments, businesses, and individuals to consider strategic steps to navigate and leverage this digital revolution effectively.

For Governments: Developing a national Bitcoin strategy has become both urgent and prudent. This strategy should encompass a broad spectrum of aspects:

1. National Security: Assess impacts associated with the integration of Bitcoin into the national economy.

2. Accumulation, Acquisition, and Storage: Create policies for the accumulation, acquisition, and secure storage of Bitcoin.

3. Network and Cybersecurity: Enhance and collaborate on network and cybersecurity initiatives to protect against potential threats.

4. Public Discourse and Education: Improve financial literacy, personal cybersecurity, and raise awareness about securing liberties and individual sovereignty through financial wellbeing.

5. Business and Talent Development: Stimulate domestic Bitcoin and digital assets related opportunities and attract foreign investments by developing a framework for business and talent development.

6. Energy Monetisation: Explore policies related to energy monetisation, leveraging stranded, excess, and waste energy for Bitcoin mining while assessing the feasibility of providing electricity to rural and remote communities.

For Businesses: Establishing a cross-functional task force with expertise across finance, legal, technology, business, and a few other key areas is now imperative to develop an organisational Bitcoin strategy. Organisations need to be prepared for the digital transformation of money and capital. This strategy should include:

1. Treasury and Capital Allocation: Integrate Bitcoin into existing treasury and capital allocation strategies.

2. New Business Opportunities: Explore and innovate new business opportunities within the Bitcoin ecosystem.

3. Digital Innovation: Focus on digital innovation in existing processes, leveraging Bitcoin’s capabilities.

4. Partnerships: Identify and leverage knowledgeable individuals for insights and perspectives in this broad and complex landscape.

For Individuals: Given the presence of nefarious actors looking to exploit vulnerabilities, individuals must remain vigilant against potential scams and financial crimes. Key actions include:

1. Education and Awareness: Stay informed about developments related to the digital transformation of money and engage in continuous learning.

2. Community Engagement: Organise or join local trusted communities to discuss Bitcoin and related topics, learning from each other to avoid pitfalls and explore opportunities.

3. Investment Strategies: Develop personal investment strategies to protect wealth from potential economic headwinds.

By taking these steps, governments, businesses, and individuals can navigate the evolving landscape of the digital transformation of money and better position themselves for the future.

Having said all that, what I am sharing here is not financial advice but an attempt to help share a perspective on the future. At the end of the day, there are risks in everything, and it is important for us to understand them where possible so that we can better navigate through this new landscape effectively. Looking forward, it is evident that we will not return to a pre-Bitcoin world.

The critical question now is whether it is riskier to own Bitcoin or not to own Bitcoin. This is a decision that every individual, organisation, and government must contemplate and decide for themselves.

Disclaimer: This is not financial or investment advice; please do your own research and evaluate your risk appetite before investing. The views expressed in this article belong to the author and not Leaderonomics, its directors, its affiliates, or employees.