Money is one of the fundamental underpinnings of the economy, yet we largely take it for granted. When we pay for our morning cup of coffee (or tea) with cash or a credit card, we tend not to stop and marvel at what just happened. Someone gave us a delicious steaming hot beverage – clearly something of value – for either a worn piece of paper or for some information from the swipe of a card – neither of any immediate value. Once you start to think about it that way, you realize what an amazing innovation money actually is compared to having to figure out what thing of immediate value you could barter for your beverage (a backrub?).
Money itself is a surprisingly old innovation, going back thousands of years. Along the way there have been three critical breakthroughs. First, a high degree of standardization — all of the US and even some far away places (e.g. Ecuador) use the US dollar. Similarly, all other countries use easily recognizable coins and bills as “tokens.” Second, the tokens used as money are no longer something that is of any intrinsic value and they are no longer guaranteed by the government to be exchangeable into something of scarcity (e.g., gold). Money tokens are valuable only in the context of a payment transaction. Third, we came up with the extension of credit and fractional reserve banking. In combination, the two have allowed us to grow economies that are much larger than the number of available physical currency tokens would permit.
Now we find ourselves at the beginning of yet another important innovation in money: the complete disappearance of physical money tokens. We are moving towards a world in which money consists solely of data that is kept someplace in the network. When we pay someone in that world all we are really doing is causing some data to move around. The shift from the physical to the virtual raises a number of exciting possibilities for the future of money including the rise of reputation currencies.
One thing should be true in a world of data-as-money: payments initiated by a known party that do not involve an extension of credit should be (almost) free at the margin. When you hand someone cash today, no one comes up and takes a portion as a fee. Similarly, if you use data representing your money to pay for your coffee that should essentially be free of fees. That is the premise behind Dwolla, and we are excited to be backing the Dwolla team on their quest to dramatically change how payments work. You can learn a lot more about everything that they are working on from the Dwolla blog or just go ahead and sign up.