Can We Replace Money?

In an insightful Forbes article by David Birch, an expert on digital identity and money, the concept of replacing traditional money with tokenized assets is explored. The idea centers around using a wide variety of assets, digitally represented on blockchains, as direct means of payment, bypassing the need for conventional money.

The Concept of Tokenized Asset Payments The theory suggests that rather than selling assets like mutual fund shares for traditional currency to make purchases, one could directly transfer a portion of these tokenized assets. For instance, buying a car could involve transferring some tokenized shares directly to the dealership. The assets would then be either kept as investments or used further in the supply chain.

Benefits and Challenges The primary benefit of such a system is the reduction of transaction costs, as it eliminates the need to convert assets into cash or stablecoins. However, this idea faces significant hurdles:

1. Transaction Overload: The sheer volume of transactions could overwhelm blockchain systems. Traditional payment systems handle millions of transactions daily, a figure that could exponentially increase if payments involved various types of tokenized assets.
2. Complexity of Transactions: Payments involving multiple types of assets could result in numerous transactions to complete a single purchase. This complexity is compounded when considering interoperability challenges across different blockchains.
3. Legal and Regulatory Issues: Money currently serves crucial legal and compliance roles, particularly in anti-money laundering and terrorism financing. Replacing money with tokenized assets disrupts these regulatory frameworks, posing significant challenges in monitoring and controlling illicit transactions.

Potential of Tokenization Despite these challenges, the potential of tokenization remains significant. The ability to use various assets directly in transactions without converting them to a common currency could streamline many financial processes. Supercomputers and AI technologies could facilitate this by quickly determining asset values and matching transaction parties.

Future Implications While the concept of using tokenized assets as a direct medium of exchange is fascinating, it confronts practical and legal realities that currently make sovereign money indispensable for everyday transactions. The evolution towards a tokenized economy will require significant technological and regulatory advancements to become a viable alternative to traditional currency systems.