Blockchain-Based Currency Will Change the Way of Money

Migration is an enduring aspect of human history, propelled by economic disparities, political instability, climate change, demographics, and global interconnectedness. These factors are expected to persist and intensify, ensuring that migration remains a prevalent and increasing phenomenon in the future, where refugees are often faced with limited or absent documentation, which makes their integration into a formal financial system impossible and therefore isolates them from financial services and economic opportunities.

Simultaneously, the rise of blockchain technology brings forth an intriguing possibility that holds great promise in the face of the ongoing global refugee and migration crisis. Imagine a modern and inclusive solution — a self-governed city, attractive for migrants and powered by the innovations of decentralised technology. This idea goes beyond just providing basic necessities to refugees; it aims at creating a vibrant environment where displaced individuals can not only find refuge but also have the chance to rebuild their lives and become actors and net contributors to economic growth and prosperity of their new domicile, while remaining financially connected to their home countries.

What Is Money?

Money has evolved from barter systems to various mediums like shells, metal coins, and paper notes, representing value and facilitating trade. Today, money is a fundamental concept in economics, serving as a universally accepted medium of exchange, a unit of account and a store of value. It plays a pivotal role in facilitating transactions and promoting economic efficiency.

As a medium of exchange, money eliminates the need for barter, enabling individuals to trade goods and services more easily. Its divisibility and widespread acceptance make transactions smoother and more efficient.

Money also functions as a unit of account, providing a common measure for valuing goods and services. This simplifies comparison, pricing, and accounting, allowing for better decision-making in economic activities.

Another crucial aspect of money is its role as a store of value. It preserves wealth across time, enabling individuals to save and defer consumption. This function hinges on money’s stability and predictability in retaining its value over periods of inflation or deflation. All these functions collectively underpin the smooth functioning of modern economies, promoting efficiency, facilitating trade, and enabling complex financial interactions.¹

The modern fiat currency system revolves around governments declaring a currency as legal tender, even though it lacks intrinsic value. Central banks have exclusive authority over the issuance of currency, steering the money supply and defining interest rates for economic growth and stability. This system operates based on public confidence in the government’s ability to maintain the currency’s value.

Fractional reserve banking complements this system. Banks are required to keep only a fraction of their deposits as reserves, enabling them to lend out the remainder. When loans are made, new deposits are created, effectively expanding the money supply. This money multiplier practice leverages trust in the banking system’s solvency.

Both fiat currency and fractional reserve banking systems heavily rely on proper regulation, prudent management, and central bank supervision to prevent inflation, bank runs, and other destabilising factors. The intricate interplay between government policy, central bank actions, and banking operations shapes the functioning of today’s financial landscape.

Unfortunately, our modern history is full of examples, where failures in political governance, regulatory oversight, central bank management, and commercial banking practices significantly contributed to economic instability, financial crises, high inflation rates and the creation of systemic risks. Such devastating circumstances often disproportionately affected vulnerable populations by prolonging cycles of poverty and pushing new people into it. Furthermore, economic crises often exacerbated income and wealth inequality with the middle class, where the poor experience the brunt of the negative effects, which eventually fosters and accelerates migration.

In total contrast to this prevailing financial system, the following section explains how blockchain technology works and how a decentral financial system could enable self-governed Free Global Cities to function more efficiently and thus work as a modern alternative to our centralised banking world.

What Is a Blockchain and How Does Decentral Money Work?

Blockchain technology is a revolutionary concept that underlies decentralised protocols like Bitcoin and Ethereum. At its core, a blockchain is a distributed and immutable digital ledger that records transactions across a normally permissionless and trustless network of computers, in a secure and transparent manner.

In a blockchain network, transactions are grouped into blocks, which are then linked together in chronological order, forming a chain. Each block contains a cryptographic hash of the previous block, creating an unbroken chain of blocks with the entire history of all transactions. This design ensures the integrity of the entire ledger – if a single block is altered, it would require changing all subsequent blocks, making tampering practically impossible.

Decentralised money, exemplified by cryptocurrencies, operates on blockchain technology. Bitcoin, for instance, is a decentralised digital currency that allows peer-to-peer transactions without the need for intermediaries like banks or even central banks. Once a user initiates a Bitcoin transaction, it is broadcast to the network and grouped with others, in a so-called block. Miners, specialised computers, compete to solve complex mathematical puzzles to validate the block of transactions and thus maintain the network. With the validation of each block, new Bitcoins are created as a reward for the miners’ work. Once a block is validated, it is added to the blockchain, and the transaction becomes irreversible.²

In contrast to our traditional monetary system, where a central institution controls the issuance, management and settlement of currency, decentralised cryptocurrencies like Bitcoin rely on a consensus mechanism to maintain and secure the network. This eliminates the need for a central authority to steer the currency’s supply and process transactions, because the money supply of Bitcoin is algorithmically predetermined, and transactions are processed by the network. Bitcoin for instance has a projected fixed supply of 21 million units (Satoshi’s), whereas over 19 million have already been created and the amount of newly mined Bitcoin is halving every four years. This also means that Bitcoins inflation rate is halving simultaneously.³

Decentralised money systems also reduce the risk of centralised control, censorship, and single points of failure. Transactions are pseudonymous. This means that they are recorded on a public ledger without revealing the personal identities of participants, and therefore enhancing privacy while remaining fully transparent. Moreover, the distributed nature of blockchain networks makes them more resilient to attacks and disruptions compared to centralised systems.

Even though Bitcoin cleverly fulfils the different economic functions of money, it remains one of the simpler applications of blockchain technology. Smart contracts on the other hand, are immutable computer programmes and self-executing digital agreements running on blockchain protocols like Ethereum and which automatically enforce terms as soon as conditions are met.⁴ Once launched, they can eliminate intermediaries and automate processes, while also enhancing trust, security, and efficiency.

In the context of a self-governed city, a state can decide to launch, maintain, and enforce its own currency or to adopt an already existing and established foreign currency as legal tender. Should the city decide against establishing its own currency, cryptocurrencies like BTC (Bitcoin) or ETH (Ethereum) could be accepted and declared as legal tender, similar to fiat currency like USD or EUR. In either way, a Free Global City could minimise central administration and effort by adopting and accepting foreign currencies, compared to operating its own monetary policy framework, central bank, treasury, and currency system. El Salvador for example accepted BTC as a second official legal tender, next to the US Dollar, in June 2021. To not exclusively depend on such young forms of money like BTC or ETH, a self-governed and modern city could also accept stablecoins, which are digital tokens, 1:1 pegged to traditional fiat currencies like USD or EUR. Relying on already existing currencies which are broadly accepted and used would significantly reduce central governance and administration, but unavoidably also leads to a dependency on external factors. Nevertheless, key functions of a national bank like currency creation and management or monetary policy would not be needed, while blockchain-based currencies and decentralised financial applications could still provide ‘banking’ and payment services. Smart contracts would ensure transparency in all financial transactions and decisions, making them auditable by the public, while ensuring privacy where needed.

In conclusion, blockchain technology enables the creation and operation of decentralised money systems, such as cryptocurrencies, which function without the need for a central bank and even commercial banks. Its potential to revolutionise our modern banking system and to make it more efficient is evident. But where its potential becomes even unlimited, is regarding the unbanked population of this world, which according to the World Bank are still around 1.4 billion adults globally. Due to the permission, and borderless nature of cryptocurrencies the entry hurdles to use them are very low, compared to our traditional banking system. A first-generation smartphone and an internet connection are already sufficient — a condition that nowadays is met by most adults in developing countries.⁵

Harnessing Blockchain for Inclusive Societies

The overall goal of a modern society must be the integration of all its citizens, including refugees. In the context of a Free Global City, refugees and migrants should be seen as an opportunity, rather than a liability. It is imperative to integrate them into society rather than confine them to isolated camps, where they frequently endure prolonged periods, sometimes spanning years or even decades, while awaiting selection and subsequent relocation to a new host country.

While digital identities and wallets can significantly improve their financial inclusion, it’s a government’s responsibility to integrate all its citizens into the labour market. Once displaced people receive a digital identity and become financially connected, they can start rebuilding their lives by getting employed or even becoming independent entrepreneurs and net contributors to economic growth of a society. Besides the presence of a modern and efficient court system, also employers should be given the responsibility for providing a sustainable and safe environment for their employees, where human rights but also the general laws and regulations of a Free Global City are adhered to.

Blockchain technology and cryptocurrencies are still very young and to a certain extent immature technologies, which are associated with specific risks and where a large part of today’s blockchain universe will consolidate or even become extinct over time. Nevertheless, its potential to address and solve very far-reaching challenges of today’s society can and should not be neglected. Current pitfalls of those technologies will be overcome through demographic changes, broad education, improved and interoperable user interfaces and the implementation of reasonable regulation where innovation is supported but also investors are protected. The hurdles and risks of using those technologies will decrease over time, while traditional financial systems will naturally remain limited to serve refugees and small clients due to the lack of incentives and business cases for banks on one hand and the increasing presence of risks dealing with developing countries on the other hand.

We live in a global and digital world, where opportunities are increasingly digital. The presence of digital alternatives to simple bank accounts as well as the unlimited potential of decentralised financial applications within a Free Global City can be a real expedient for refugees towards financial freedom and towards a sustainable integration into an inclusive society where technology enables equal opportunities.

References

¹ N Mankiw, R Kneebone and K McKenzie, Principles of Macroeconomics, 9th edn (Cengage Canada, 2023).

² A Antonopoulos, Mastering Bitcoin: Programming the Open Blockchain (O’Reilly Media, 2017) 195.

³ S Ammous, The Bitcoin Standard (Wiley, 2018) 177.

⁴ A Antonopoulos and G Wood, Mastering Ethereum: Building Smart Contracts and DApps (O’Reilly, 2018) 127.

⁵A Demirgüç-Kunt, L Klapper, D Singer and S Ansar, The Global Findex Database 2021: Financial Inclusion, Digital Payments, and Resilience in the Age of COVID-19 (World Bank, 2022) 33.