21 March 2019

Samual Cowell

School of Earth and Environmental Sciences, University of Portsmouth

mvf4@hotmail.co.uk

“He who controls the spice controls the universe.”

― Frank Herbert, Dune

Abstract

Digital assets deliver a technological upgrade to the general economic world. Providing benefits ranging from real-time gross settlement transactions to allowing a portion of a fine art piece to be traded on the speculative markets. Payment corporations such as Ripple are working with leading global economic organisations to develop digitised payment systems to provide where 1970’s correspondent banking simply cannot facilitate today. In an ever-changing technological world, the need for a digital monetary system seems a logical progression. The means and consequences of implementing such a system, however, brings both its hardship and recompense. This review of economic cycles and the role of digital assets in the inevitable digital economic transformation will provide insight into such phenomena.

Contextual Foundation

Kondratiev waves; an economic hypothesis of cyclic ‘waves’ of the global economy, typically over the course of decades. The Soviet origins of this theory lay in The Major Economic Cycles (1925) where Nikolai Kondratiev argued the notion of a three-phased cycle: expansion, stagnation, and recession. Many have disputed over the validity of this principle due to the specificity of cause and time frames to which the theory adheres to (Quigley, 2012). Despite this, application and correlation of ‘K-waves’ to modern economics is relevant; when used in a general sense rather than situations having to abide by a strict time scale and set causes. The subsequent case studies show how technological innovation, excessive speculation and credit creation for non-productive use are indicators and evidence of large, long-term economic cycles.

In prehistoric society, anthropologists suggest that our means of trade and exchange were direct from item(s) of value to another item(s) of value that provides equally to each indebted participant of the trade without an intermediary item of value; bartering. An example could be a farmer trading his yield for resources to expand his farm to better his production. Evidence suggests that bartering was not the sole process of trade and exchange; but in fact there was a pivotal transition into the use of monetary items with the likes of valuable ores and gemstones being used as intermediary value; this deduced as the process of trading objects was time-consuming and logistically restrictive with the case of large transaction — livestock or significant quantities of items (Humphrey, 1985). Anthropologist, Professor David Graeber suggests that this transition relies on the societal acceptance of trade with an intermediary to be “I owe a unit of something” instead of just owing “something” (2011). Here we see an expansion of trade with surplus resources between humans, a stagnation of the process whereby the means of trade were not compatible enough, to the point of needing a new expansion that provides a solution to the limits of exchange via item(s) of value in bartering — a Kondratiev wave.

The industrial revolution; spanning the last of the 18th through to the earliest of the 20th centuries of Britain’s history the rise of industrialised technologies/ production methods and socioeconomic developments brought about the shift from an agrarian society to one of mass-production, transport and communication systems, and the reform of business ownership to stockholders. Industry wasn’t the only mover within this period, politics reacted to this new found wealth with the rise of the middle class, and the working classes desire for rights and welfare within a society that had exploited their labours in its rising infantile stages (EEB, 2019). Again, a cycle is seen with new industrial methods and technology to which stagnates and requires reform when the exploited working class become aware of their role and demand fairer treatment.

The ‘Roaring Twenties’ brought great optimism in a postwar society with a technological upgrade, industrial and economic growth. Speculators were naive to the idea of unsustainable growth and idea of debt bubbles from credit creation for financial transaction, and were encouraged to do so; banks lending using stock as collateral. The Federal Reserve announced warnings of excessive speculation and its consequences. These were ignored, an example is that two days later, banker Charles E. Mitchell announced that his company, the National City Bank, would provide $25 million in credit to stop the market’s slide. Though this did bring a temporary halt to the market movement, production of goods and services went into recline; a key sign of inbound recession. There was a 20% rally until September of ’29 whereby the Dow Jones Industrial Index hit a peak of 381(PBS, 2008). Come October of the same year several instances of major sell-offs occurred throughout two days at the end of the month — “Black Monday” and “Black Tuesday”. These days brought a combined loss of $30billion or 25% to the market (PBS,1999). The reaction of this lead to a consensus that a decentralised federal economic system was not functional (Werner, 2003).

Post-WWII Japan saw a period of great recovery followed by prosperity — the war economy. This in part due to Reparation payments as part of the Marshall Plan, but also the economic structural regime emplaced to achieve this recovery (Nakamura, 1981). Said recovery and prosperity brought Japan to the 2nd largest global economy by the 1960s; second only to the US. The means by which allowed this stable growth was a heavily regulated bureaucratic economic system whereby industry was broken up into ‘cartels’; they competed not for profit but for market share. These cartels were funded by the credit creation of the central bank, Bank of Japan. As one can imagine this system was highly restrictive for speculators and shareholders; something that was a major element of economies in the western world, namely the US. As time went on, Japanese economists who had been educated in the US/ studied western economic systems did not see this system as globally competitive. In 1986, Haruo Maekawa — former head of the Bank of Japan — announced the Advisory Group on Economic Restructuring‘s ‘10 year economic reform plan’; with an intention to rise Japanese living standards to be scalable to that seen in the west — “the time has come for Japan to make a historical transformation in its traditional policies on economic management and the nation’s lifestyle…there can be no further development for Japan without this transformation”. This report called for administrative reform and removal of the bureaucratic powers; this goal displaying a desire to abolish the war economy and thus replacing it with a free-market as seen in the US. Those within the advisory group who did not concur with this direction were relieved of their positions.

The late 80's saw a conflict of interest between the Bank of Japan and the Japanese Ministry of Finance, as the Ministry of Finance did not see the transformation fit as it would remove their control of monetary policy. The Bank of Japan counteracted this by using window guidance not to limit and direct credit in a sustainable fashion as intended, but instead to encourage commercial bank lending to create a credit bubble. The extent of this lending can be seen in instances where first-time buyers were being given loans twice the size of their request, the average working-class person having two or more properties, and to the point which the general public dubbed it ‘excess money’ (Werner, 2003).

Despite being deputy governor of the Bank of Japan during this period of misused window guidance, thus a creator of the bubble, Yasushi Mieno was praised amongst the media as he put an end to this monetary policy. The Bank of Japan raised inter-bank lending rates in 1989, bursting the bubble and causing the stock market crash (Reuters,1989).

In 1990 alone, the stock market of Japan fell 32%, land prices during the whole crisis period (1990–2003) fell 84%, and the stock markets fell 80%, 212,000 business declared bankruptcy. In light of this situation, now head of Bank of Japan, Mieno stated “Thanks to this recession, everyone is becoming conscious of the need to implement economic transformation.” a statement that was a certain gravity when considered alongside his colleague’s, Toshihiko Fukui, statement when questioned prior to the crash about his reluctance to change the Bank of Japan’s window guidance quotas: “Because the consistent policy of monetary easing continues, quantity control of bank loans would imply a self-contradiction. Therefore we do not intend to implement quantitative tightening. With structural adjustment of the economy going on for quite a long period, the international imbalances are being addressed. The monetary policy supports this, thus we have the responsibility to continue the monetary easing policy as long as possible. Therefore it is natural for bank loans to expand.”.

Western free market economy structure ensued, the economic focus moved from banks to the stock market via removing bank deposit guarantees and introducing tax incentives for market investment; shifting from manufacturing to services, deregulating and privatising the economy as a whole. All the while, unemployment rose, income disparity broadened, and so did suicide and violent crime.

2002 saw the Bank of Japan negatively influence the bank balance sheets causing many to foreclose. The Ministry of Finance opposer, Hakuo Yanagisawa, declined the offer to use taxpayer money to fund these banks, in essence nationalising them and using them to disrupt and bankrupt large firms via the calling of company loans. The Prime minister subsequently fired Yanagisawa. He was replaced by Heizo Takenaka, who approved the offer; increasing borrower foreclosure via accounting policy task force formed of two former Bank of Japan employees, creating inevitable nationalisation -Toshihiko Fukui said: “While destroying the high growth model, I am building a model that suits the new era.”(Werner, 2003).

1997 saw the Asian Tiger economies holding a weak foundation in regards to maintaining a fixed exchange rate with the US dollar. Within a year, unilateral collapse saw a 60–80% loss in value. In response, these nations (South Korea, Thailand, and Indonesia) aggressively deregulated their monetary policy and their capital accounts, enabling free borrowing from abroad. These nations were capable of managing the situation without outsider borrowing, however, lobbyists from the IMF, WTO and US treasury had been organising this deregulation, allowing for such borrowing to occur — all under the guise that free market economies and free capital movement had proven to increase economic prosperity, according to neoclassical economics.

This outsider influence was more clearly illustrated by the central bank’s and their refusal to change exchange rates despite national interest rates rising, creating an incentivised borrowing scheme, making borrowing in native currencies more costly than the US dollar. With increased ‘credit planning schemes’ from the central banks but falling loan demand amongst productive sectors, due to them borrowing from abroad, commercial banks had to resort to lending to high-risk borrowers. Imports shrunk as the central banks backed their currencies to the US dollar, competition amongst these nations reduced but their balance sheets maintained value as the foreign issued loans counted as exports.

The Korean won, Thai baht and Indonesian rupee saw failed attempts by their corresponding central banks to peg their exchange rate against the dollar when it came to speculator sell-offs at the overvalued exchange rate; foreign reserves were almost completely drained. The central banks were aware of the requirement of an IMF bailout to avoid default, and the likely demands they would make in this case; independence of the central banks. Knowing this the finance minister of Thailand flew to Tokyo to discuss a bailout, given Japan’s then $213 billion foreign reserves (larger than the whole IMF); the US government prevented this on behalf of the IMF.

Subsequently, the IMF developed internal offices in the central banks and dictated new monetary policies; capping credit creation and rising interest rate, causing the high risk loans, taken on from the time of incentivised foreign borrowing, to default — this sharp rise in debt caused the Asian Tigers banking system to be walking the border of bankruptcy, with even stable firms falling victim to a seemingly deliberate IMF led attack as noted by mainstream media in these nations and even the Malaysian Prime Minister, Mahathir Mohamad.

The degree to which this attack on these nations’ economies was deliberate, became confirmed amongst IMF led studies into the degree of bankruptcy to occur in South Korea should the interest rate rise 5%; the IMF’s first policy with South Korea was to raise the interest rates 5%.

This action bearing significance when the IMF decides to not bail out these banks, but instead sell them as distressed assets to US investment banks. However, in the subsequent year 1998, the IMF did not go this route with US banks in this position (Werner, 2003).

2007 and the years building up saw the unsustainable housing market bubble; the use of subprime mortgage bonds coupled with extensive leveraging with the likes of CDO’s playing the leading role in contribution (Williams, 2010). The incredible impact of these bonds was due to a two-sided inadequacy surrounding the asset to which they were based. On one side lending was allowed so frivolously that some adopted ‘NINJA’ policies, where clients could get a mortgage with no income and/or no job; here lies the risk of default. Then on the opposite side, subprime mortgage bonds were being exploited for maximum asset price potential, by disregarding the quality categorisations and placing a ‘cocktail’ of high risk and medium risk mortgages into the bonds under the categorisation of what was previously considered a strong low-risk bond. Alongside this, those that did not sell due to being deemed too high risk, in much the same fashion, were redistributed in a pack bond called a Collateralised Debt Obligation; which due to being presented as a diversified asset, received ratings as high as 93% AAA — very low risk. This process extended to which point that the unsold, high-risk CDO’s received the same treatment; repackaged as CDO²; which could then be speculated upon in the form of a ‘Synthetic CDO’ (Lewis, 2010).

From its peak prior to the recession (Feb ’07: 12,786), the Dow Jones Industrial Index fell to its lowest level in March of 2009 at 6,443.27 (Amadeo, 2019). In Britain alone, unemployment rose from 877,000 in April 2008 to 2.49 million in October 2009 (The Telegraph, 2010).

The US faced a loss of $5 trillion in pension money, real estate value, 401k, savings, and bonds; 8 million job losses and 6 million of the population displaced from their homes.

In 2015, despite being known as one of if not ‘the’ major cause if the Great Recession, banks began selling “bespoke tranche opportunities”; dubbed by Bloomberg News as “a renamed CDO” (Lewis, 2010).

From these case studies, one may deduce the notion that throughout history there have been extended periods of time that house an expansion, be it technological or economic, or even both, followed by stagnation or recession, whereby a new expansion arises as a solution, and thus the cycle renews. There is also a further deduction that, in some instances, these cycles had deliberate incurrence by the central banks and supranational finance organisations — the IMF — (or even the latter via the infiltration of the former) to bring economic, political and monetary policy restructuring.

Today, global debt has risen 43% since 2008, global GDP rose 37% (Matsuzaki et al, 2018).

In response to the actions that caused the Great Recession, an anonymous creator, under the alias ‘Satoshi Nakamoto’ developed a “Peer-to-Peer Electronic Cash System”, named Bitcoin (Nakamoto, 2008).

Digital Assets

Defined as any digital file/program that is copyrighted intellectual property; this can be as diverse as digital songs, films, pictures, documents or software. In this setting of global economic systems, however, digital currencies and payments software/networks are the relevant movers from this asset class (Vowels, 2013).

Cryptocurrency, a digital medium of currency using cryptographic encryption to perform secure transactions; this performed on a public, distributed ledger, usually blockchain, as an open transaction database (Greenberg, 2011). Lansky defined a cryptocurrency, and its broader system, as to have 6 requisite elements (Lansky, 2018):

The system does not require a central authority, its state is maintained through distributed consensus. The system keeps an overview of cryptocurrency units and their ownership. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units. Ownership of cryptocurrency units can be proved exclusively cryptographically. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

XRP, created by David Schwartz and Jed McCaleb in their prior venture OpenCoin, is a cryptocurrency designed as bridge asset to perform near-instant ‘Real-Time Gross Settlement’ transactions (1–4 seconds) with the highest security; a combination of public and private key encryption creating as Schwartz analogised ‘an impenetrable tunnel with two password locked doors at either end’.

Now known for its notoriety with the payment system corporation Ripple, it is used within the open source public ledger made in partnership with Ripple; the Interledger Protocol. Through the use of distributed ledger technology XRP will provide as a global bridge currency; a common asset for ‘cross-boundary’ payment and real-time settlement; removing the costly structures to compensate for vast numbers of currency pairings and exchange rates.

Schwartz, during his degree prior to his work at the NSA, applied for a patent in 1988 for a distributed computer network, providing a delegated use of computing power (Del Castillo,2018).

The January 1988 publication of The Economist featured a main article on a digital one world currency that would come to fruition in 2018 after the realisation of the limitations of fiat currency (The Economist,1988).

“First, as we saw with the introduction of the U.K.’s Faster Payments System, more efficient payments lead to a dramatic increase in overall transaction volumes. As Ripple drives new efficiency in payments globally, our partners expect an unprecedented level of scalability…With Ripple and ILP, banks can leverage unlimited scalability and complete transaction privacy.” Ripple (2015).

Interledger Protocol; designed to create a common platform for payments irrespective of the ledger they are on, bridging the compatibility gap of current payment systems. Functioning as a ‘monetary connector relay’ between differing ledgers, it uses an escrow and receipt confirmation system to ensure there is no risk of the connector losing the money in the transaction. Due to this, the path of a transaction can be theoretically as long or a complex as possible, with latency being the only trade-off. With being an open source platform it ‘levels the playing field’ meaning everyone on the ledger has an equal, global reach (Schwartz et al,2016).

Ripple runs its ‘Ripplenet’ on the ILP platform whereby its main products are enacted, in the name of developing the ‘Internet of Value’:

xCurrent: Efficient global payments “Existing enterprise software solution that banks and other financial institutions currently use to instantly send and receive cross-border payments with end-to-end tracking and bidirectional messaging across RippleNet.”

xRapid: RTGS and liquidity “Built for payment providers. As we’ve gone out to market with xCurrent, we uncovered an untapped need for a low-cost liquidity solution for emerging markets. xRapid uniquely uses XRP to lower the liquidity costs of payments in emerging markets.”

xVia: Public payment software “xVia is for those who want to send international payments through a bank or payment provider on RippleNet. xVia offers a standard interface as a simple API that enables users to send global payments with transparency into payment status and attach rich payment information, like invoices.” (Ripple, 2017).

One of the defining features of the RippleNet payment ledger system is that it uses a ‘consensus’ blockchain network, not the traditional ‘proof of work’ system. This is the process that validates transactions; for example, if someone makes a payment to two recipients, trying to ‘double spend’ tokens, the network comes to a cumulative agreement of which payment comes first and thus is valid. The traditional ‘proof of work’ network does this by using computers connected to the network performing calculations solving cryptographic equations. ‘Consensus’ however works via a distributed agreement protocol, whereby computers act as validators of the transaction just by identification of which appears first. This method has clear advantages, low cost due to being a unilaterally instructed system with a specific set of rules that is more secure thus doesn’t have security cost that ‘proof of work’ holds; it is more environmentally sustainable as the validator ‘nodes’ are not performing a calculation for the validation of a transaction, simply an identification, thus power demand is a minute fraction of ‘proof of work’. A more subtle benefit is the more decentralised system as there is not a central authority to approve validation, only rules that all ‘nodes’ have to equally abide by, ridding any influence over validation. (Ripple, 2018)

XRP, being an independent digital asset, is also leveraged in the context of other payment system products via the use of ILP based systems (Everis, 2017). R3, a global payments provider, built a blockchain payment system in 2016 — Corda. This platform allows for its participating users to make global payments using the technological benefits integrated with existing infrastructure. Taking form in two versions; Corda Open Source (public), Corda Enterprise (corporate), it is adaptable to the participant user. To provide a liquid asset to which contributes the goal of ‘Real-time Gross Settlement’, XRP is opted as a mode of payment on the platform (R3, 2019).

Hyperledger; an umbrella project, to improve cross-industry collaboration via the use of blockchain and distributed ledger technology- in order to provide a global standard for business transactions of the world’s major financial and supply chain companies; a network of networks, if you will (Linux Foundation, 2016).

February of 2019 saw J.P.Morgan become the first US bank to develop a fiat currency representative digital coin. Enabling instantaneous internal institutional transactions backed 1:1 to the US dollar held by J.P.Morgan for their customers (e.g., Banks, Broker-Dealers, Corporates) (J.P.Morgan, 2019).

The presence of digital assets has been established, they are not anymore an experimental payment medium made as a protest to a seemingly unfair financial system. As seen, institutional curiosity has taken blockchain and distributed ledger technology under its wing; developing industry standard systems to facilitate such technology in a global economic setting.

Central Banks and Transformation

From as early as 2014, central banks have been in contact with Ripple regarding digital assets and distributed ledger technology; both the Bank of England and Reserve Bank of Australia reached out directly on this topic; requesting information on their systems and the implementation of them into ‘legacy systems’ (existing infrastructure) (Ripple, 2014a, 2014b).

In more recent years, both the Bank of England and Federal Reserve participated in a proof of concept testing partnership; both of which showed promise in enabling global real-time gross settlement systems — in functioning conjunction with ILP (Ripple, 2017b) (FPTF, 2018).

These partnerships hold weight once considered alongside the subsequent publications that show that both central banks intend to have the main elements in place for a functioning RTGS payments systems by 2020 (BoE, 2017) (FPTF, 2018b).

The US Department of The Treasury released an executive order report “A financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation” in July 2018. This report aims toward the role of technology in finance and the logistics of employing new technologies into existing infrastructure as well as the means of developing new infrastructure for the betterment of the US but subsequently its partners also. With seven core principles the executive order plans to:

“A. Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

B. Prevent taxpayer-funded bailouts;

C. Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

D. Enable American companies to be competitive with foreign firms in domestic and foreign markets;

E. Advance American interests in international financial regulatory negotiations and meetings;

F. Make regulation efficient, effective, and appropriately tailored; and

G. Restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.” (USDT, 2018).

The executive order not only shows that the US government are in the preparation stages of a transformation into a more technological financial and economic age; but also includes an appendix of ‘Participants in the Executive Order Engagement Process’. This being the organisations to which will bring the aims of the executive order to fruition, it

consists of categories of participants — Government and International, Experts and Advocates, Trade Associations, and Firms. Ripple alongside R3, are the only digital asset payment institutions listed to which both use XRP as their preferred digital asset for real-time gross settlement. Among this list are several clients and partners of both payment firms; a few being Bank of America, BBVA, Credit Suisse, Amazon (Web Services), Visa (via their acquisition of Earthport — a Ripple enabled payment provider) (USDT, 2018).

“The advantage is clear. Your payment would be immediate, safe, cheap, and potentially semi-anonymous. As you wanted. And central banks would retain a sure footing in payments. In addition, they would offer a more level playing field for competition, and a platform for innovation. Meanwhile, your bank, or fellow entrepreneurs, would have ensured a friendly user experience based on the latest technologies.” — Christine Lagarde (IMF, 2018)

The IMF are clear advocates of digital economies and the digital assets the constitute and create them. In a speech at the Singapore Fintech Festival of 2018, Lagarde addresses central banks an suggests they should consider the development of a native digital currency (much like the aforementioned JPMcoin) in order to provide for the digital age coming into fruition in our contemporary society — “That currency could satisfy public policy goals, such as financial inclusion, and security and consumer protection; and to provide what the private sector cannot: privacy in payments,”. Lagarde also notes that this native central bank currency could provide the necessary stability need to our currently unsustainable and unstable financial system; with a fixed number of ‘tokens’ there is no worry of currency deflation, without cash the worry of a public bank run, and being based on a distributed ledger, money laundering will be heavily hindered.

The executive chairman and founder of Ripple, Chris Larsen, is a member of the IMF’s High-level Advisory Group for Fintech.

Lagarde and Mark Carney, of the Bank of England, have publicly talked of the requirement for a financial reset and to ‘level the playing field’ of global economics in order to progress in without global economic imbalance (WEC, 2014).

The link between the financial leaders — central banks, supranational financial organisations alike — and digital assets is far from tenuous. The intent of developing global digital monetary systems is proliferate in amongst such institutions; via various means but all culminating to distributed ledgers and bridge assets for transaction.

The Tokenised Digital Economy

In the UK alone less than 30% of payments are transacted via cash (William-Grut, 2019); the talk of a cashless society has been in discussion since the 1980’s — the form of this cashless, digital economy is what has been the subject at which such an idea has been deemed fanciful.

A presentation by the technology consortium Everis, on the role and adoption of blockchain technology, illustrates the outlook of how this new digital economy will develop in the coming years — from present to 2025.

Focusing around the benefit of ‘Distributed Ledger Technology’ in global digital payment networks, the evolution of the Internet of Things is used as a comparative analogue of how blockchain adoption will potentially pan out; into the ‘Internet of Value’ — as coined by Ripple.

The maturation of the technology is another key consideration drawn up as describing the development from experimental technology assets such as Bitcoin and the Ethereum network, to enterprise standard system solutions such as RippleNet, Corda, Interledger Protocol and the Hyperledger (Everis,2017).

A series of infographics from the presentation display the potential evolution of global payment systems from correspondent banking to a fully interoperable ‘Internet of Value’:

“Blockchain Technology Adoption” Infographics (Everis, 2017).

An R3 report from 2016 discusses the formation of Fedcoin, a digital asset for the federal reserve to use in place of the dollar; it discusses the application of currently existing digital currencies and their eligibility to fit this role and comes to the issue of supply surrounding Bitcoin whereby, via mining the transactions, the ability of ‘double spending’ the token causes a deflationary effect. Whereas XRP is already ‘preallocated’ the whole supply of the token is already existing outright this without risk of being ‘doublespent’. The Federal Reserve can subsequently control the coin more effectively and manage demand between digital and tangible cash without fault; as the report compares to how central banks already manage demand between note type via printing and shredding reserves- they will simply exchange and store these two monetary mediums in accordance to demand.

Security Token Offerings are a digitised asset of a security; they are developing as an alternative investment asset class. The adoption of utility tokens such as the Ethereum platform to develop tokens pegged to security asset value allows for greater asset exposure and accessibility; be that, ETFs, stocks, derivatives, real estate or even art.

As published in a Deloitte report this allows for previously illiquid assets to break into the financial markets — the aforementioned derivatives and fine art etc; this is done via being traded on a secondary market dictated by the issuer of the STO. The platform of a token allows for many benefits; accessibility being a prime example, opening up a wider audience due to the partitioning of the asset via the token’s divisibility and the lack of time constraints of trade as these markets can function 24/7 365. Upon this the nature of digital assets allowing for faster payments and lower payment costs further expands horizons, allowing for higher volumes and not deterring small scale investors; again due to the nature of digital assets security and transparency is readily available via the ‘trace-ability’ of a distributed ledger (Deloitte, 2018).

The 18th of March 2019 saw IBM launch its blockchain payments network, World Wire. Much like Hyperledger, Interledger, and Corda, this a payments network facilitated by digital assets of the clients choice — as yet only two are available but is subject to expansion upon user request. The notable significance, apart from its esteemed corporate originators, is the development of institutional digital assets (aka “stablecoins” like JPMcoin and Fedcoin) to take the place of the institutional holdings in a compatibility medium for the payment system with some of its major clients, namely banks (Wolfson, 2019).

Such systems create a digital financial framework that tackles borders and spans the globe. With the interoperability in place via foundations and umbrella networks (ILP, Hyperledger respectively) access to this digital economy is only limited to internet access.

Ripple’s founder Chris Larsen made the bold statement that Ripples payment system will finalise globalisation as both data and goods have seen the process but money is still burdened by 1970’s correspondent banking (SWIFT) (Forbes, 2018).

The rise of mobile banking in the likes of sub-Saharan Africa is a product of a larger financial issue that, as illustrated by a World Bank study that 1.7 billion people globally in these impoverished populations are unbanked due to lack of banking expansion to these countries. However, 66% of these populations have a smartphone with internet access, thus allowing them to be part of the new global digital economy (World Bank, 2018).

The Bill and Melinda Gates’ foundation developed Mojaloop, a Ripple powered “open-source software for financial services companies, government regulators, and others taking on the challenges of interoperability and financial inclusion.” (Mojaloop, 2019).This will harness the prevalent smartphone penetration into these unbanked areas of the world to ‘level the playing field’ financially reducing poverty as the populations have a greater economic exposure; STO’s maybe?.

However, the other end of the spectrum back in the UK, millions are at risk of being isolated within this shift; those who are elderly, disabled or in rural areas and thus limited to their infrastructural access/reception are left struggling within a society without cash. The same goes for certain trades such as household services like window cleaning being a business whereby 85% of payments are made by cash (Peachey, 2018).

Another concern around a cashless, tokenised, digital economy is the actuality of this transfer into a new age of finance and monetary system is the exploitation of those in positions of power to further their control of the general populous and the wealth divide between them.

Professor Richard Werner wrote a report that took from prior studies of his into central banking. In brief, he concluded that the perception displayed to the public, is a facade of financial control and power, as their actions such as controlling interest rates do not actually equate to the kind of growth they portray to contribute towards via such changes as markets are never in equilibrium. This of course to someone of an empirical eye begs the question of their efficacy, relevance, and morality of their actions — as illustrated in the contextual case studies.

Thus it is clear that the use of a digital currency a nation’s central bank for the populous would give ultimate control of economic transaction and who conducts them (Werner, 2018).

The idea of a global economy comprising of many digital tokenised economies, therefore, is a natural progression when considering the implementation of such assets into economic systems. The subsequent consequences of such an economy can be deduced to provide many benefits in several aspects of the financial sector, be it providing a more accessible system by ridding the need for physical infrastructure in impoverished populations, or opening previously illiquid assets to provide more scope to the speculative market. However, dependent on the handling of such technologies by those with power and influence, it can be seen to develop scenes of omnipotent control of, potentially, a whole nation’s financial means.

Potential Conclusive Outcomes

Global debt recently hit a new high of $244 trillion, despite global growth rates increasing since the Great Recession debt has risen greater, as of Q4 2018 the global debt-to-GDP ratio surpassed the 318% mark (Oguh, 2019). Growth reports of 2018 show that the global economy is grinding to a halt. Growth figures at their weakest since the 2008 crisis, UBS stating a 2.1% annualised pace from Q4 2018, significantly lower than their forecast for growth in 2019 (O’Brien, 2019). Interestingly, even with acknowledgement of the growth slowdown and the inverted yield curve of the US treasury (seeing as high as the 7-year become inverted and the 10-year), the Federal Reserve has decided to not increase interest rates (Timiraos, 2019); a situation similar to that mentioned earlier in the Asian Tiger case study.

Major economy growth rates (O’Brien, 2019).

Given the situation that is in our midst, it is clear that digital assets are most certainly are and will be a portion of global economics. Though in its infancy, the infrastructure is planned, establishing its place and growing. As seen in the contextual case studies, those in the financial elite, be it central banks, governments or supranational finance organisations, have much foresight in the process of economic reform and restructure. This, alongside the much-documented intent of digital asset use by such economic powers, suggests that the tactics seen in the cases studies may also be just as present. That then leads to the potential outcomes in the foreseeable future as to how this transformation will take place.

Proposed are two main possibilities, one with an alternate pathway:

Hard Transformation:

In this scenario, one assumes those in control of global finance perform as they have in cycles past. In which case the currently looming debt bubble bursts, resulting in the worst economic crash to date to which is exploited by those conscious of its occurrence, namely the oligarchs purchasing large reserves of distressed assets and their wealth expanding as money flows out of traditional financial markets, into tangible assets, commodities and digital assets (as seen in Turkey and Venezuela (Watson,2018)(Hernadez, 2019)). The economic powers of the world suggest that cash should be abolished due to its unsustainable nature, replaced by digital currency due to its much superior stability and efficacy. This then has broadened the gap between those who were prepared for this paradigm shift and those who were not, and reinforcing economic oligarchs control via the digital currency.

Alongside nations digitising their currencies, tokenisation of assets will follow suit as the relevance of tangible assets falls. The breadth of tokenisation will surpass the spectrum of speculative investments as we know now, break open illiquid markets, and create better accessibility for the general populous to these markets.

A bridge token, XRP, will act as the liquid transaction medium between this vast tokenised economy; preventing the requirement for a convoluted mess of currency pairings.

1.a. Medium Transformation

In this version of the ‘hard transformation’ the presence of XRP as a bridge between the tokenised economies, rids the need of Nostro/Vostro reserves in banks for cross-border payments, figures of up to $27 trillion (Garlinghouse, 2017) have been quoted as the value of such capital surplus. Therefore, the release of this capital could be used to soften the impact of the economic crisis and stem the downward pressure.

Soft Transformation:

This second scenario takes from the variable in scenario one, but with one crucial difference. Instead of the need for a crisis to ensue economic reform, as seen to be the case throughout history, this possibility assumes that the integration of digital assets into the global economy is a gradual assimilation due to a process of ‘Technological Darwinism’ rather than being a solution to a catastrophic situation.

This will be done so via the liquidity issue being stifled with released capital and the emergence of digital currencies being integration alongside cash at first and then maturing and proving their efficacy in a stable fashion as times go on.

Regardless of which situation comes to fruition, the transformation is inevitable whatever form it takes. The technology has shown its worth and is readily expanding into our current economic system. The cracks are showing under traditional means of exchange and monetary policy, be it currency deflation or unbanked populations, digital currencies serve better. In a world where data and goods are near-instantly accessible and globalised, why should money and value be treated so differently? The need for an economic technological upgrade is present and imperative. As with most transitions those who are conscious and prepared yield the best of the situation. The age-old cycles of development, stagnation and recession, then renewed development continues and will likely do so through the natural progression of the human race, forevermore.

References