A Brief Perspective on Money Technology, by Joao Reginatto

For years I have approached the concept of money from the perspective of a technologist. When I started working in financial technology 20 years ago, the first thing that struck me was just how bad the quality of the stack was. I learned about Bitcoin in 2012 and it was impossible for me not to associate it with the idea of Internet technology stack - above all, a candidate protocol for money. I have now been working in the so-called stablecoin space for over six years, and I care deeply about improving the global monetary stack. Starting in 2017 I led the build out of USDC for Circle, and helped establish it as an important piece of crypto market infrastructure over the best part of 6 years. More recently in the summer of 2023 I joined M^0 Labs to continue to follow my passion for re-architecting the global tech stack for money.

But what is money? While it might sound like a silly question at first, it doesn’t take much to recognize that this foundational component of our modern lives is a mostly mysterious concept.

Most people narrowly think of money as payment instruments - the coins, the paper notes, the cards and electronic balances they utilize to participate in transactions as they go about their daily lives. To a great extent - and whether intentionally or not remains only to be speculated, when one initially studies the mechanism or the history of money, the superficial explanations that are given tend to mostly address the vehicles that mankind have creatively utilized to facilitate value exchange over several thousands of years: topics like barter, cowrie shells, tally sticks and coinage.

That is a rather simplistic take on the topic. Money is likely the most complex mass-adopted technology ever created.

What most people and businesses experience routinely is merely the top layer of this dense technology stack. Bank accounts, cash, payment instruments - these are all façade constructs that sit on top of a sophisticated system. As with most technology, consumers don’t really care about it as long as it works adequately. Most drivers don’t care about how their internal combustion engine vehicles work, until there’s enough concern that these vehicles emit large quantities or harmful air pollutants. Bringing it back to the crypto industry, most stablecoin users don’t care about how a particular stablecoin actually works, until a point when there’s a black-swan event and its reserves evaporate.

Even in those examples, the majority of users of technology indirectly rely on small groups of actors who care enough about how things work under the hood to the point that they decide to enact change. I come to work every day because I care dearly about how money technology works, and finding ways to improve it. From this point on, I assume you care too.

‍Early Money Technology

The reality is that money is extremely hard to grasp and explain, but it has always meant in one way or another a debt-based system that connects producers and consumers of value. Money technology actually precedes writing technology, so the history of some of the earlier systems was only ever interpreted but not formally recorded. Many believe (or are taught) that money technology emerged primarily as payment instruments to improve on previous bartering economies. In other words, humans started using shells, sticks or even metal, to facilitate value exchange that was previously done by swapping one set of goods for another. It would follow that more sophisticated monetary constructs were built on top of that currency-like foundation. It is, however, widely accepted that such chronology of events is false. In fact, credit-systems based on social norms existed originally in ancient Mesopotamia, and IOU instruments were managed at the community level to facilitate trade. Primitive forms of capital and currencies were subsequently introduced to more easily represent the exchange and settlement of these IOUs.

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Money technology has debt as one of its core mechanisms.

Given its complexity, one useful way to think about how money works as technology is to break it down into layers. At the very base layer of money would be an agreed-upon belief system - the attribution of value to certain concepts or assets, and trust or consensus mechanisms around it. At the very top, on what could be called the application layer, would be the frontend or utility components of money that directly create day-to-day value for users. But most importantly, connecting the base layer and the application layer is a complex middleware that orchestrates how money is created or destroyed, who is allowed to do it, how efficient these qualities are, and what infrastructure is available to build on top of.

From a historical point of view, the base layer of money is really slow to evolve. The application layer is much more nimble and adaptable, but it’s also not where profound improvements can take place. The middleware of money is actually the most complex and interesting source of innovation.

‍The Base Layer - Good Money and Bad Money

At the base layer, and since man was first known to use some form of money technology over 5000 years ago, we have witnessed a back-and-forth cycle between two major approaches. On the one hand there’s the Bullion approach, where the base layer of money is architected around hard assets - precious metals such as gold or silver. On the other hand there’s the Credit approach, where the base layer of money is built around social norms and virtual systems.

As mentioned earlier, a Credit approach to the base layer of money was the initial monetary cycle pretty much everywhere money originally emerged around 3500 BCE, whether across Mesopotamia, Egypt or China. Trust systems benefiting from the emergence of the first large urban centers, like Uruk, were used to record who owned what to whom, while transactions were denominated in whatever suited the use case best, whether it be cowrie shells, knotted strings or clay tokens.

A Bullion cycle took over circa 800 BCE when coinage systems were created in different parts of the world. The money base layer was for the first time built upon hard precious metals, which coincided with the development of professional armies, increased slavery, and international expansions. It lasted until around 600 CE, after the decline of major powers such as the Roman Empire, or the Han dynasty in China.

Another Credit cycle followed through the Middle Ages. With large empires fallen, there were no military means to extract precious metals, and communities were left to their own luck. This again led to a base layer of money powered by fragmented virtual credit systems. Interestingly, the hoards of precious metal reserves that had been accumulated by empires slowly moved into religious organizations.

The next Bullion cycle wouldn’t emerge again until circa 1450 CE, with the dawn of the great capitalist empires. With major international trade routes, the insatiable hunger for precious metals on the part of dynamic Asian economies, and the incredible flow of fresh bullion from the just-discovered American continent, the stage was set for a new world order. Up until now, most cycles had exhibited similar money base layer patterns across different regional systems. This time, an actual global base layer of money was witnessed for the first time with the Gold Standard era spearheaded by the Bank of England. It all started to crumble with World War I, after which Britain decided to abandon the standard. The torch was passed to the United States and its growing global hegemony - in 1944 with the Bretton Woods agreement, most currencies in the world would be pegged to the US Dollar, which in turn would have a convertible path to gold. Finally in 1971, then US President Richard Nixon announced US Dollars would no longer be convertible to gold, ending the last Bullion cycle.

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It is interesting to note that a Bullion approach to the base layer of money seems to coincide with periods of war, or generalized violence. In times of conflict, there is less space for trust, and precious metals have proven over time to be a common value belief that does not require trust. Most importantly perhaps, precious metals can be stolen. So in times of chaos, a simplistic approach to stabilizing or growing one's economy is to just go fight someone else and steal their gold and silver. Due to the nature of precious metals, a money base layer architected around Bullion has scaling limitations, and also leads to more centralized systems.

A Credit approach to the base layer of money, on the other hand, seemed to coincide with more decentralized human societies. The social norms and trust systems that underpin virtual credit economies benefit from shared location - it’s much easier to trust who you know. The systems of trust also tend to develop stronger institutions and the rule of law.

The reality is that when one studies the history of the base layer of money, it is clear that the cycles are extremely long - we’re talking about centuries. While it might seem that the world has abandoned the Gold Standard all the way back in 1971, we are likely just in the very initial phase of a new Credit base layer cycle. Nobody can really predict what the implications are of a new virtual credit system era. But as a good trader would say: the trend is your friend.

‍The Application Layer - Lipstick on a Pig

Despite being the layer that by definition touches the users of money, the application layer of money is not where profound changes typically happen.

The utility and user experience of money remained mostly the same for centuries - I will spare you the details on why barley is so much more exciting than clay tokens. Paper money only emerged in the 11th century, and it wasn’t until a couple of centuries ago that better technology and standards allowed cheques to become a more useful payment instrument. Modern-day credit cards emerged in the US in the 1950s to revolutionize payments. Banks were eager adopters of early computer technology - that helped create a substrate upon which digital user experiences could be built.

But it wasn’t until the Reagan-Thatcher era, when regular workers were encouraged to own a piece of capitalism, that the top layer of money really expanded in terms of utility. Easier access to investment in equities, 401k accounts - the options began to rapidly expand.

The advent of the commercial Internet poured gallons of fuel to the fire. “Online” and “digital” banking became a shared vision across the industry. The emergence of the smartphone created the perfect platform for always-on digital finance. Peer-to-peer lending, robo-advisors, crowdfunding - it seemed like the world was our oyster.

Unfortunately, the fintech revolution was over-promised and under-delivered. The heavy IT investments the banking industry made during the mainframe era would not transfer over easily into Internet architectures (or simply not at all). Banks are, at the end of the day, regulated database operators, and that architecture depends on secure, centralized systems. Fintech entrepreneurs built next generation digital experiences that ultimately relied on an outdated banking middleware that was not designed to be modular, or to operate always-on, 24x7, globally. Like lipstick on a pig, these applications seemed exciting and attractive, but they either had severe limitations under the hood or faked around the limitations by making inefficient use of capital, thus becoming unsustainable business models. It wasn’t until the advent of Bitcoin in 2009 that we had technology to actually digitally represent scarcity in the open Internet, so there is hope for real innovation at the application layer of money if the middleware substrate is re-designed for purpose.

‍The Money Middleware - So Much Juice‍

Let’s cut to the chase: the money middleware layer that connects the base layer with the applications of money is where most of the complexity, and thus opportunity for innovation, lies.

The money middleware builds on the foundational belief system - the base layer, and defines how money is created and destroyed, who is permissioned to perform such actions, what are the governing rules and incentive mechanisms, and what infrastructure will be used to connect all the components together.

Once again, from a historical perspective, most of the innovation we are currently familiar with in this part of money technology has happened with the advent of modern capitalism. The joint stock corporation, commercial banks, central banks, bond markets, brokerage houses - these are all components of a functioning money middleware. While a lot of these components have been well established since the reigns of the Bank of England and the City of London, the current incarnation of money middleware is fairly recent. Nowadays, and considering that the base layer of money is a fiat system, central banks and regulators coordinate in order to permission and incentivize the commercial banks to manage the supply of money in the desired direction, as well as distribute it into certain applications in the economy.

Historically, there were times when money issuance was accessible to a much broader set of actors. There’s no doubt that over the last two centuries or so, the money middleware has become increasingly controlled by the state. This isn’t necessarily questionable, but in a world where many clamor for more regulation, perhaps we need to talk instead about better governance. At a time when currency issuance is a native primitive of secure, transparent, append-only blockchain based ledgers, it seems like a missed opportunity to not consider that substrate for the governance of money middleware functions.

The other side of the money middleware is the infrastructure that connects all the components together, facilitating transport and settlement. We have very little in the way of global settlement layers with reduced intermediation and good quality of service. Money, from a global standpoint, still makes use of extremely expensive and costly transport technology. Some innovation has been produced in recent years within a particular money middleware system (belonging to a single country or block), but it mostly leverages proprietary and centralized data sources, as opposed to open protocols based on Internet architecture. At the same time, the non-interoperable and siloed nature of today’s middleware data sources has created a slew of clearing and settlement intermediation components that are unlikely to be required in a blockchain-powered money middleware.

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Stablecoins v1

Is it all bad news though? As the so-called stablecoin sector in crypto has grown dramatically since its inception 7 years or so ago, there’s a lot of hope that this technology can play some role in the next generation tech stack for money.

Unfortunately, that doesn’t seem to be the case yet, at least for the current incarnation of stablecoin products - what I would call v1.

First of all, despite some constructs having a very elegant design, any stablecoin that isn’t compatible with the current base layer of money (i.e. the current fiat system), will not be able to seamlessly plug into broader use cases. In other words, crypto and / or endogenous collateral mechanisms are going to remain niche.

Second, the lack of clear and responsible governance around these products will likely limit the amount of scale they can achieve. Here, issuers should be careful what they ask for. Delegating the entirety of governance to state regulation, and wedging itself into a particular regulatory buckets or jurisdictions might limit what global appeal the solution could have. It is questionable whether regional stablecoins are a valuable construct.

Third, the business model for v1 of stablecoin products seems very much broken and bound to be disrupted. Stablecoin issuers typically don’t play in the application layer of money - they instead distribute downstream to players that do (venues such as crypto exchanges, lending & borrowing platforms, dollarized accounts, etc.). The application layer players are creating all of the utility and bearing the cost and risk of customer relationships, and yet they aren’t able to monetize the float. This seems like an unsustainable arrangement.

Finally, it makes most sense for stablecoin technology to over time behave like money middleware. But yet, no product in the v1 vintage was actually designed for that. The solutions are all mostly thin layers on top of the archaic banking system, behaving more like a payment rail (placed really at the application layer of money). They do not allow for multiple actors to take on issuance, nor are they interoperable with each other. Imagine how crazy it would be to live in a world where in 2024 my Chase dollars are not compatible with your Bank of America dollars.

‍Money Can Be So Much Better‍

Money is such a complex piece of technology. The middleware of money in particular is where most of the value is created, but also where most of the complexity resides. We live in trying times. The belief system and trust mechanism of our money base layers are being pushed to limits never before tested. Technology advancements surround us, and yet money middleware is mostly stuck in the 1970s. There are more than enough reasons to care about how money works - and to enact change.

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Joao Reginatto
Chief Strategy Officer, M^0 Labs

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References

If you want to go deeper on the nature of money technology and its evolution, here are the texts I personally recommend.

• Bagehot, W. (1873). Lombard Street: A Description of the Money Market.
• Bindseil, U., & Pantelopoulos, G. (2023). Introduction to Payments and Financial Market Infrastructures.
• Graeber, D. (2014). Debt: The First 5,000 Years.
• Ferguson, N. (2009). The Ascent of Money: A Financial History of the World.
• Mehrling, P. (2011). The New Lombard Street.
• Mehrling, P. (2022). Money and Empire.
• Weatherford, J. (1997). The History of Money. 

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