Payments innovation vs. Money innovation

Paypal. Square. M-Pesa. iZettle. Mobile payments. Mobile Cash. Barclays Pingit. These are some of the buzz companies that change the way we are going to transact. But these companies are disrupting only the payment space, which is a sub section of the social tool Money.

Money is a concept. It’s like Language. It’s not really possible to “innovate” the concept. Language is a social tool for communication, Money is a social tool for commerce. Currency is the thing that enables the use of the concept Money the same way words enable the use of Language. How do you transmit words from one person to another? Using your voice. Using a written documents. Etc. Telephone was an innovation that changed the way we can transmit words from one another. The text message changed the way we transmit words from one another. But neither the telephone nor the text message changes the concept of Language nor the words themselves. There was some change to words, for example the extensive use of shortcuts, like “how R U ?” etc. but these are minor modifications.

Money is like Language. Currency is like Words. And payment platforms are like the telephone or text messages.

Square and Paypal innovate the payment space. Bitcoin innovates the Currency space. Both Square and Paypal would be able to change the way we transact Fiat Currencies, and the way we transact Decentralised Crypto Currencies.

Money is Money is Money. It’s a social tool, it’s a concept that needs Currency in order to be operational in the real world. Currency is the technology, the infrastructure, the ecosystem to operate the concept of Money. Every Currency, Commodity Currency (Like gold), Fiat Currency (Like Dollar), or Decentralised Crypto Currency (Like Bitcoin) have many components, many parts of the infrastructure. Payments is just one part of this infrastructure.

 

 

“It’s the purchasing power, stupid”

What is Money? It’s a social tool to facilitate commerce at large scale. What is Currency? Currency, are chips / symbols, things that facilitate the use of the concept Money. Currency to Money is like Words to Language. Like building blocks to the concept of House. Currency are chips / symbols that represent…. represent what?

People will say that Currency units represent value, represent faith, represent some ownership of mysterious assets held by the government and back the Currency. Are they? The answer is much simpler. Currency represent purchasing power. Currency is just a ledger, an abacus, a sheet of paper with notes, signs on a tree that represent what I can claim and what you can claim.

Imagine that you and I are living on an island. We both work. We produce things that we need. We collect Coconuts. You work hard. You collect More Coconuts than me. Every day at 5pm we bring all the Coconuts to our warehouse and mark signs on a tree. On the left, you mark the Coconuts that you brought. On the right I mark the Coconuts that I brought. What we are doing is using Money! The marks are our Currency!

It’s a horrible Currency. It’s not Scarce because I can come at night and counterfeit more marks… it’s Fungible OK, because each mark is like any other mark… but it’s not really Divisible, I can’t easily divide each mark to smaller marks… it’s not Durable as the marks will disappear with time… and it’s not Transferable… if we leave the island we can’t really take the marks with us…

But it’s Currency. Whenever I feel like eating a Coconut, I go to the warehouse, take a Coconut and cross one of my marks. I used my Currency. This is obviously a simplification, don’t try to develop the analogy too much, but the idea is clear. What matters is that the marks on the tree represent the purchasing power I can command over the pile of Coconuts.

The same way the Dollars you hold represent the purchasing power you command over goods and services in the economy. The Dollars themselves are just signs, symbols, they are not part of the wealth. If you are stuck on an isolated island, one million Dollars won’t really help you… Money is a social tool, if you hold Currency, but there are no other people, then it’s useless.

People ask, well what about gold? Gold was used as a Currency and has an intrinsic value. People used if for decoration, to symbolise power, it’s a metal we use in industry, how can you say that Currency has no intrinsic value at all?

Well the answer is simple. In order to use the tool Money, people need Currency. You can’t speak without words, you can’t use Money without Currency. And you need something that is scarce, fungible, divisible, durable, and transferable. People use Gold, or sugar as Currency because they have these five properties to some extent. They don’t use Gold or Cigarettes as Currency because they have value, they use them as Currency because to some extent they are scarce, fungible, divisible, durable, and transferable. The Dollar is an invention, a very sophisticated one, a sophisticated technology that  produces tokens, symbols, things that to some extent are scarce, divisible, fungible, durable, and transferable and therefore can serve as Currency and operate the social tool Money in an economy. Bitcoin is also a technology that produces Bitcoins, Currency units that can and will serve as Currency to operate the social tool Money.

If you want to know if something is a Currency, try to think if it has, will have or had purchasing power. Don’t ask yourself if it holds any intrinsic value, if it can store value, or if anyone backs it. These are interesting questions, but not the right ones. And if you want to know what is the purchasing power of a Currency? What is the “value” of a Currency? What is the exchange rate and how is it been determined? Well “it’s the supply and demand, stupid” but this is for another post!

People confuse Money and Currency – it’s not the same thing!

Don’t confuse Money and Currency. It’s like saying that Language and Words are the same thing! Language is a social tool. It’s an abstract concept. Words are the things that comprise this tool. House is not the bricks and the windows, house is the whole thing.

Money is a social tool to facilitate commerce at large scale. How does this tool work? Well this is a little complicated, but to simplify:

(-) You define a unit – let’s say one Dollar

(-) You define a way to represent this units – let’s say physical green bucks, or green bits on a computer

That’s it. People exchange these bucks or bits because it’s easier to exchange them than to exchange sugar or cars or cheese and when they need something they exchange the bucks and bits with things that they need. They exchange the bucks and bits with a portion of the total wealth of the economy.

So Money is a concept, and green bucks and green bits are Currency. Currency is the thing that comprises Money . It’s like the Words in a Language.

Both US and China use the tool Money. And both use the type of Money that is called Fiat, but the US uses the Currency Dollar, and China uses the Currency Renminbi.

It’s important – don’t confuse Money and Currency. Don’t confuse Language with Words, it’s not the same thing!