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In Algorithms We Trust

MIT Sloan Senior Lecturer Michael Casey

“When I confessed on air that I only began to understand the true nature of money after researching cryptocurrencies, it instantly became a headline,” says Wall Street Journal currency reporter and MIT Sloan Senior Lecturer Michael Casey. He made the remark during a 2016 interview with host Laura Shin for the Forbes unChained podcast. “I’m sure some people were shocked and others amused, but I think anyone who listens to the full podcast will appreciate where I was coming from.”

During the interview, Casey reflected on the wholly irrational habit we have of thinking about money as a real thing. “What we conceptualize as a dollar, a euro, a renminbi is actually a complex—and invented—social system for tracking our debts to one another,” he says. One consequence of this epiphany for Casey was that it transformed him from a blockchain skeptic into a blockchain advocate.

A lesson from the history of money
In The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order, Casey and coauthor Paul Vigna note that, for most of its history, currency has been issued by emperors, monarchs, dictators, and democratically elected governments. Those rulers have consistently stamped their images and symbols of authority on bills and coins, reminding citizens of the deep societal connection between money and centralized control.

“The value of a dollar has grown up around a common and quite reliable societal consensus about what underpins it and how much you can redeem with it,” says Casey. “It’s a story we tell that has no intrinsic truth, just a shared understanding. But to function smoothly, our system also requires the authority of governmental entities and the services of trusted intermediaries such as banks. We could not have built our civilization without them.”

But breakdowns such as the 2008 global financial crisis demonstrate how vulnerable our existing model is when trust begins to erode. The crisis also opened people’s minds to innovation. Many became convinced that traditional currency systems, which dominate current global economic activity, should no longer be relied upon as the sole viable option for how we represent and organize the exchange of goods and services.

A new symbol of shared truth
Most of us were raised to view our omnipresent financial institutions as trustworthy keepers of shared truths about our debts and payments. We’ve also accepted, albeit grudgingly at times, the fees that banks and other intermediaries charge for maintaining accurate ledgers of our transactions. Few believed we could create an efficient, viable alternative. That made us dangerously dependent upon the specialized keepers of trusted transactions—bond and securities brokers, insurance agents, financial lawyers, payment processors, and credit card companies.

The advent of cryptocurrency, however, has introduced the prospect of a dramatic shift in the existing balance of power. As Casey and Vigna explain in The Age of Cryptocurrency:

The simple genius of this technology is that it cuts away the middleman yet maintains an infrastructure that allows strangers to deal with each other. It does this by taking the all-important role of ledger-keeping away from centralized financial institutions and handing it to a network of autonomous computers, creating a decentralized system of trust that operates outside the control of any one institution.

Possibilities abound
“Thinking of bitcoin and other cryptocurrencies as alternatives to the dollar is the least interesting—and least useful—possibility for blockchain technology,” Casey says. “Many of the countless token systems out there are actually smart contracts that exist for the purpose of running blockchains. Those blockchains function as incentive systems that run in a decentralized fashion around a particular objective.”

One example Casey cites is Basic Attention Token (BAT), a blockchain-based digital advertising ecosystem that is built on top of Ethereum. “The BAT utility token works as a governance system for the media world,” explains Casey. “In the BAT ecosystem, publishers earn BATs from advertisers based on the amount of attention users give to the ads. Publishers then spend their BATs to publish more content on the platform. Users, in turn, receive some BATs for viewing ads, and they can use those tokens to purchase premium content or services on the platform. That direct exchange of value among the primary participants eliminates the costs associated with intermediaries in traditional media ecosystems.”

Casey also sees enormous potential in cryptocurrency to move value between native currencies without the expense and friction of intermediaries. “The World Bank estimates that 1.7 billion adults worldwide don’t have access to bank accounts,” he says. “That means that when family members earning money abroad want to transfer some portion of it back home, they must pay exorbitant fees. Developers now are exploring the use of blockchain technology to move funds across the world phone-to-phone—with Facebook’s Libra project being the latest to dive into this financial inclusion push. These ideas threaten to disrupt the existing financial-institution architecture, but that may be a small price to pay for onboarding billions of hitherto excluded people into the global digital economy.”

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