Everything ancient is new again, and as we move rapidly into the mass adoption of digital, non-fiat currencies, we can learn from history and the system of stone money created by the inhabitants of the Micronesian island of Yap.
Known as Rai or Fei, these large circular carved disks of primarily calcite, which range in size from 1.5 inches to 13 feet in diameter still exist today in the thousands. These stones were quarried on several Palau, Guam and other islands, and brought to Yap for use as money.
As described on a Wikipedia page, “the monetary system of Yap relies on an oral history of ownership. In the case of stones that are too large to move, buying an item with one simply involves agreeing that the ownership has changed. Assuming the transaction is recorded in the oral history, it will now be owned by the person to whom it is passed, and no physical movement of the stone is required.”
Rai stones today are rarely used, mainly for special occasions (marriages, alliances, social and political events). The physical location of the stone is not as significant as the recording of the names of the former and current owners, but what is most important is the clear understanding of who owns the Rai stone at present, and for these reasons, some historians have pointed out that this “rock-based currency” was an early example of a distributed ledger. Economist Milton Friedman has compared the monetary role of the stone money to the reserves of gold held in Fort Knox for foreign governments.
Fundamental to the functioning of the Rai system – and distributed ledger systems – is trust – or trustless as some define the ability to exchange value without (necessarily) a “middleman.”
For crypto currencies to work, there must be more than just a storage of value. It’s frequently argued that Bitcoin and other blockchain-based crypto currencies are like gold, but better. Commodities like corn are worth something because they can be eaten; real estate can be lived in; fuel can be consumed to power vehicles, and so on.
What is the intrinsic value of gold or Bitcoin?
Many argue it’s based on the “greater fool theory,” meaning it’s only worth what the next person is willing to pay you.
This underestimates the power of blockchain’s differentiated value proposition: no banks, fiduciaries, credit card companies, and other “processors” required to do a transaction. Middleman are removed and replaced by collective of machines. This decentralized, permanent ledger allows peer-to-peer transactions to occur while being permanently recorded for ever – never altered or changed.
We’ve seen the financial markets develop over the years, and today they could be evolving faster than ever before with massive disruption on the horizon as blockchain and distributed ledger technologies (DLT) matures.
People used to swap physical securities (certificates) when they were bought and sold, with young men shuttling paper from one brokerage house to the next. In the 1970s, Wall Street created an early version of the Depository Trust & Clearing Corp. (DTCC) to electronically organize and validate and the recording of transactions.
Today, the DTCC records around 90 million daily transactions, stored on their servers, and backed up in various locations. Thousands of financial institutions and exchanges in 130 countries rely on DTCC for custody, clearing, settlement and other clerical services. (After an unsuccessful experiment led by DTCC working with Accenture, DTCC rerouted its strategy, and will be processing records for around 50,000 accounting for around $10 trillion using a customized distributed ledger called AxCore, an ethereum-based blockchain created by Goldman Sachs and JPMorgan-backed Axoni. Some believe the project was slowed by the uncertainty surrounding Brexit).
When DTCC succeeded originally with their electronic system, it dramatically lowered cost, and put a real crimp in the courier industry who made a living delivering securities all around Wall Street.
Beyond securities and derivatives, the same concept was applied to precious metals. Once a physical-only market where gold was moved from vault to vault, sales of gold became entries in electronic databases. Metals traders in the 80’s who could buy enough gold and cut bulk deals with the armored car companies could make a living just buying and selling gold and moving it from vault to vault more efficiently than the next guy. In the 70’s and early 80’s if you walked around Wall Street, you’d see armored cars all over the place. Most people thought they were just picking up and dropping off cash at the banks but in many cases, those vehicles were filled with gold.
Blockchain is the next technological enhancement to a proven approach that worked for hundreds of years.
We don’t have to create massive stones anymore, rather collect bits, and attach them to ledgers. There’s a lot of leverage in that model, which we predict will drive even more investment and innovation in blockchain on Wall Street.
Maybe one day we’ll replace the Bull that stands on the Bowling Green a few blocks from the New York Stock Exchange with a Rai Stone.