Every so often, new technologies emerge that force us to reconsider our assumptions about the world. Cryptocurrencies and digital assets have sparked a renewed interest in the concept of money and have challenged our traditional understanding of how money works.

Cryptocurrencies like Bitcoin are still newborns in the grand scheme of money history. Bitcoin is widely considered to be a byproduct of the financial crisis of 2008. It was created in 2009 by an unknown person or group of people using the name Satoshi Nakamoto. The first open-source Bitcoin client was released on January 9, 2009, and hosted at SourceForge. 

Hal Finney, a programmer, was one of the earliest Bitcoin supporters, adopters, and contributors. He downloaded the software on the day it was launched and received the first transaction from Nakamoto, which involved ten bitcoins, on January 12, 2009 (block 170).

Understanding digital currencies can be challenging for individuals who grew up in the traditional money era. Questions like where the money is, how to spend it, and which bank it belongs to often arise. These are common queries from people unfamiliar with the concept of digital money. 

These are all legitimate questions, yet they prompt more profound questions like "What is money, anyway?"

Before the introduction of money, people traded goods and services directly through a system called barter. Barter involves exchanging one item or service for another. However, this method is inefficient, requiring both parties to possess something the other desires. Money serves as a solution by serving as a medium of exchange. 

But money wasn't always Benjamin Franklins. Initially, commodities like gold, silver, and salt were used as currency due to their value, durability, and ease of division. As trade evolved and became more intricate, more advanced forms of money were introduced, including coins and paper money.

The Lydian stater, minted around 600 BC in the kingdom of Lydia in Anatolia (present-day Turkey), is the earliest known coin money. These coins were fashioned out of electrum, a mixture of gold and silver, and decorated with various animal images and symbols. Here are some fun facts about the stater: 

• Size: about the size of a modern quarter.

• Weight: about 6.5 grams.

• Standardized: first coin to be minted on a large scale and standardized in weight and purity.

Today, the United States Dollar is the most commonly used currency worldwide, with the Euro following. Interestingly, the pound sterling is the oldest currency still used, dating back to its initial issuance in England in 793 AD.

In today's world, fiat currency is the most commonly used form of money. Unlike other currencies, they are not backed by any physical commodity but rather by the full faith and credit of the issuing government. The U.S. dollar was originally a commodity-backed currency. However, in 1971, President Richard Nixon ended the dollar's convertibility into gold, making the dollar a fiat currency.

The reasons for this important decision and its implications are hotly debated among different schools of economic thought  — but it is crucial to understand that the value of the USD depends on the trust people have in the U.S. government. 

What happens when people lose faith? 

When populations lose faith in a fiat currency, a number of consequences can follow: 

• Hyperinflation: Hyperinflation occurs when prices rise so rapidly that the value of the currency plummets. This can make it difficult to buy goods and services and lead to economic collapse.

• Economic stagnation: Citizens may be less likely to invest or spend money, leading to economic stagnation as demand for products and services drops. 

• Political instability: People are less likely to support the government if they believe it cannot manage the economy.

In some cases, the loss of faith in a currency can lead to the currency's collapse altogether. This has happened in several countries, including Zimbabwe and Venezuela.

Notably, merely 8% of the global currency exists physically, per the International Monetary Fund. The remaining 92% only exists as digital entries in computer databases. Therefore, we are already utilizing digital currency in a sense. 

Still, many people find it difficult to envision a reality where Americans utilize a currency other than the U.S. dollar. 

Let us examine the characteristics that define a viable currency.

• Durability: able to withstand wear and tear.

• Portability: easy to carry and transport.

• Divisibility: able to be divided into smaller units.

• Uniformity: same size, shape, and weight.

• Limited supply: scarce so that it maintains its value.

• Acceptability: accepted by businesses and individuals as a medium of exchange.

The dollar meets many of those requirements, but many digital currency advocates take issue with the supply characteristic. The Federal Reserve, the United States central bank, controls the supply of U.S. currency. 

The Fed has three main tools for controlling the money supply:

• Reserve requirements: The Fed sets reserve requirements for banks —  the percentage of deposits that banks must hold in reserve. By raising or lowering reserve requirements, the Fed can increase or decrease the amount of money that banks have available to lend.

• The discount rate: The discount rate is the interest rate that banks pay to borrow money from the Fed. By raising or lowering the discount rate, the Fed can make it more or less expensive for banks to borrow money.

• Open market operations: The Fed can buy or sell government securities in the open market. When the Fed buys securities, it injects money into the economy. When the Fed sells securities, it withdraws money from the economy.

When the Fed eases monetary policy, it is increasing the money supply. This can be done by lowering reserve requirements, lowering the discount rate, or buying government securities in the open market. Easing monetary policy can stimulate economic growth by making it easier for businesses to borrow and invest. It can also lower interest rates, making it easier for consumers to borrow money and spend.

When the Fed restricts monetary policy, it is decreasing the money supply. This can be done by raising reserve requirements, raising the discount rate, or selling government securities in the open market. Restricting monetary policy can slow economic growth by making it more expensive for businesses to borrow and invest money. It can also raise interest rates, making it more costly for consumers to borrow money and spend.

The Fed's decision to ease or restrict monetary policy is based on several factors, including the state of the economy, inflation, and interest rates. The fact that a small group of people has such vast power to impact the U.S. and the global economy is another reason some people want to consider alternatives, like digital-native currencies. 

However, it is essential to exercise caution since digital currencies are still in their early stages of development. Making hasty decisions could lead to unforeseen outcomes. The world economy is a complex system comprising a network of other complex systems, so it’s impossible to predict second-level and beyond effects of major transformations. 

What is the future of money? 

I don’t know, but it’s hard to see a non-digital future when I look out very far. Given the increased popularity of mobile payments, growing distrust of governments, and the benefits of digital money, such as efficiency, transparency, and security, a transition to digital currency will likely occur at some point. 

Central banks worldwide are also getting in on the digital currency action — many are developing central bank digital currencies (CBDCs).

A central bank digital currency (CBDC) is a digital or virtual currency issued by a central bank that functions as a legal tender. It is similar to physical money but exists only in electronic form. CBDCs are designed to offer the same features and benefits of physical money while providing the advantages of digital currencies, such as speed and efficiency.

This may seem like a nice compromise, but many digital maximalists argue that this undermines the money freedom that genuine digital currencies offer — keeping the control centralized. They are unconvinced by the concept of utilizing a similar centralized, fiat money system with marginally improved technology.

Predicting the money system ten years from now is impossible. Nevertheless, discussing sound money is beneficial regardless of the outcome — an educated society is less susceptible to manipulation.